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Pengrowth Energy Trust $24.80 – Toronto symbol PGF.UN

PENGROWTH ENERGY TRUST $24.80 (Toronto symbol PGF.B; SI Rating: Average) produces oil and gas in western Canada. The company was one of the first Canadian royalty trusts, starting up in 1988. It’s now one of the largest energy trusts in North America. Pengrowth also holds an 8.4% interest in the Sable Offshore Energy Project. This project consists of six gas fields located near Sable Island, east of Halifax, Nova Scotia.

In the three months ended March 31, 2006, Pengrowth’s revenue rose 21.7%, to $291.9 million from $239.9 million. Cash flow per unit rose 7.3%, to $0.88 from $0.82.

Pengrowth’s average daily production of 58,825 barrels of oil per day equivalent is weighted 55% toward oil and liquids and 45% natural gas. In the latest quarter, the company’s average realized price for oil was $63.31 U.S. and $8.76 U.S. for gas.

Pengrowth’s long-term debt is low at 29% of shareholders’ equity. The trust recently raised its monthly distribution 8.7%, to $0.25 from $0.23 per unit, for an annual yield of 12.1%. The trust distributed 85% of its cash flow as distributions in the latest quarter.

Pengrowth is spending $236 million this year on capital expenditures, including exploration and development drilling.

Pengrowth created its current system of class “A” and “B” units in 2004, to comply with Canada’s foreign-ownership requirements for income trusts. Right now, only Canadian investors can hold the ‘B” units. However, proposed changes to Canada’s Income Tax Act will let Pengrowth keep its Canadian mutual trust status, regardless of the level of its foreign ownership.

Consequently, Pengrowth now wants to convert its “A” and “B” units into a single class of units on a 1-for-1 basis. If two-thirds of unitholders approve, the change will take effect on July 27, 2006.

A single class of units will improve liquidity, and make it easier for Pengrowth to pay for acquisitions with new trust units. It would also enhance Pengrowth’s appeal as a takeover target. Prices of the two classes of units will probably converge as the date of the change nears.

Pengrowth Energy Trust is still a buy. Investors should buy the cheaper “B” units for a higher current yield.

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