Pengrowth Energy Trust $28 – Toronto symbol PGF.A

PENGROWTH ENERGY TRUST (Toronto symbols PGF.A $28 and PGF.B $23; SI Rating: Average) owns all or part of several oil and gas properties in Alberta and B.C. Properties that Pengrowth operates account for 55% of its production. The remaining 45% comes from minority investments in other energy projects, including an 8.4% interest in the Sable Offshore Energy Project south of Nova Scotia.

Pengrowth prefers to focus on proven properties with sizeable reserves. It also sticks mainly to conventional oil and gas properties, instead of more risky types of investments like oil sands. Conventional assets supply 80% of Pengrowth’s production, while heavy oil and natural gas liquids supply the other 20%. That gives it more stable cash flows, and keeps its operating costs down.

Due to bad weather and a shortage of drilling equipment, Pengrowth’s capital spending in 2005 fell slightly, to around $1.15 a unit. Since Pengrowth will shift most of this work to 2006, capital spending will likely rise to roughly $1.45 a unit.

This should not hurt Pengrowth’s ability to increase its current annual cash distribution rate of $3.00 a unit, payable monthly. It now yields 10.7% for the ‘A’ units (13.0% for the ‘B’ units). Pengrowth should earn $2.06 a unit in 2006, and the ‘A’ units trade at 13.6 times that figure (11.2 times for the ‘B’ units).

Pengrowth is a buy. Canadian investors should buy the cheaper, higher-yielding ‘B’ units.

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