pengrowth
PENGROWTH ENERGY TRUST $12 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 289.8 million; Market cap: $3.5 billion; Price-to-sales ratio: 2.4; Dividend yield: 7.0%; SI Rating: Average) has proven oil and natural-gas reserves that should last 8.3 years at current production rates. However, it hopes to expand its reserves by doing more drilling on its existing fields in western Canada. That’s a slower route to growth than buying properties from others. But it takes less capital and avoids the risk of big losses when acquired properties fail to live up to expectations. Pengrowth earned $0.32 a unit (or a total of $84.9 million) in 2009. That’s down 79.7% from $1.58 a unit (or $395.9 million) in 2008. Cash flow per share fell 42.7%, to $2.09 from $3.65. These declines mainly reflect a 26.4% drop in oil and gas prices (on a combined basis). In response, Pengrowth cut its monthly distribution by 30.0%, to $0.07 a unit from $0.10, to free up cash for more drilling. The current annual rate of $0.84 yields 7.0%....
ENERPLUS RESOURCES FUND $23.70 (Toronto symbol ERF.UN; Units outstanding: 176.8 million; Market cap: $4.2 billion; SI Rating: Extra Risk; Dividend yield: 9.1%) is one of North America’s largest oil and gas trusts. Its production is 60% natural gas and 40% oil. Enerplus continues to build a well-diversified portfolio of properties. It aims to balance these between low-risk, shorter-term assets that generate steady cash flow (such as conventional oil and gas and shallow-gas properties), and higher-risk, longer-term assets (including shale gas and oil sands). The trust’s long-term debt of $571.8 million is just 13.6% of its market cap. It pays out only around 55% of its cash flow as distributions, and yields 9.1%. Ottawa will start taxing income trusts in 2011. However, Enerplus has over $2.5 billion in tax losses that it can use to delay its conversion to a dividend-paying corporation until 2013 or later....
Lower oil and natural gas prices weighed on the cash flow and stock prices of these two resource trusts in 2009. However, recent announcements should improve their prospects in 2010. PENGROWTH ENERGY TRUST $11 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 289.5 million; Market cap: $3.2 billion; Price-to-sales ratio: 1.9; Dividend yield: 7.6%; SI Rating: Average) produces oil and natural gas, mainly from properties in western Canada. Natural gas accounts of 60% of its production; oil supplies the remaining 40%. The extra exposure to gas has hurt the trust lately, as gas prices are down more than oil prices. In 2010, Pengrowth will spend $285 million on exploration, developing its current properties, and buying new properties. That’s up 29.5% from $220 million in 2009. About 70% of this spending will go to oil projects, including $15 million for its Lindbergh oil-sands project. Lindbergh could account for 40% of Pengrowth’s reserves when it begins producing crude oil in six years. The trust will also spend $12 million on its the promising Horn River shale-gas discovery in B.C....
PENGROWTH ENERGY TRUST, $10.26, Toronto symbol PGF.UN, earned $78.3 million, or $0.30 a unit, in the three months ended September 30, 2009. That’s down 81.5% from $422.4 million, or $1.69 a unit, a year earlier. Cash flow per unit fell 42.7%, to $0.63 from $1.10. Revenue fell 37.3%, to $325.3 million from $518.7 million. These declines mainly reflect lower oil and natural-gas prices. On a combined basis, Pengrowth’s average selling price dropped 33%. As well, its average daily production fell 4%. That’s partly because of a maintenance shutdown at the Sable Offshore Energy Project last summer. The trust owns 8.4% of this business, which operates three offshore-drilling platforms south of Nova Scotia. In October, Pengrowth raised $285 million in a unit issue. It put these funds toward its $1.3-billion long-term debt, which is now a manageable 40% of its market cap. The trust also cut its monthly distributions by 30%, to $0.07 a unit from $0.10. The new annual rate of $0.84 yields 8.2%. Distributions accounted for 44% of Pengrowth’s cash flow in the latest quarter....
PENGROWTH ENERGY TRUST $10.26 (Toronto symbol PGF.UN; Units outstanding: 289.0 million; Market cap: $3.0 billion; SI Rating: Average) has sold 28.8 million trust units to the public for $10.40 each. The sale generated roughly $285 million. Pengrowth will put this toward its $1.4-billion long-term debt, which is 48.3% of its $2.9-billion market cap. The new units increased the total outstanding by roughly 11%. However, lowering its debt will help Pengrowth keep paying its monthly distributions of $0.07 a unit, for an 8.2% yield....
Starting in 2011, Ottawa will impose a tax on distributions of income trusts, including royalty trusts. This will put trusts on an equal tax footing with regular corporations. Many trusts are converting to corporations as a result. Some are even cutting their distributions. However, as we noted in a recent issue of Canadian Wealth Advisor, two royalty trusts have an enviable advantage when it comes to dealing with the new tax. Oil and natural-gas producer Enerplus Resources Fund (symbol ERF.UN on Toronto) has over $2.5 billion of tax losses on its books. It can use these to defer its conversion to a dividend-paying corporation until 2013 or later. Similarly, Pengrowth Energy Trust (symbol PGF.UN on Toronto), which also produces oil and gas, has $3.0 billion in tax losses that it can use to hold off the trust tax until at least 2013....
POTASH CORP. OF SASKATCHEWAN, $105.95, Toronto symbol POT, rose 3% this week on speculation that Australia-based BHP Billiton plc (New York symbol BHP) may try to buy the company. BHP is the world’s largest mining company, and a recommendation of our Wall Street Stock Forecaster newsletter. BHP is developing a potash mine near Potash Corp.’s operations in Saskatchewan, so combining these would offer some cost-cutting opportunities. Moreover, potash prices are low right now, so it would make some sense for BHP to make an offer. That’s not reason enough to buy shares of Potash Corp., but it adds to their appeal. Meanwhile, Potash Corp. earned $0.82 a share in the three months ended September 30, 2009 (all amounts except share price in U.S. dollars). That’s down 79.1% from $3.93 a year earlier. Sales fell 64.1%, to $1.1 billion from $3.1 billion....
PENGROWTH ENERGY TRUST $11 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 258.4 million; Market cap: $2.8 billion; Price-to-sales ratio: 1.2; SI Rating: Average) produces oil and natural gas, mainly from properties in western Canada. Natural gas accounts for 60% of its production; oil supplies the remaining 40%. In October, the trust cut its monthly distribution by 30%, to $0.07 a unit from $0.10. The new annual rate of $0.84 yields 7.6%. The lower payout should save Pengrowth roughly $93 million a year. That will help it pay down its $1.4-billion long-term debt, which is equal to 50% of its market cap....
These four resource stocks are more risky than, say, Imperial Oil or EnCana. Still, we feel that their large reserves and low-cost operations put them in a good position to take advantage of rising demand for commodities as the global economy recovers. However, only three are buys right now. POTASH CORP. OF SASKATCHEWAN $96 (Toronto symbol POT; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 295.6 million; Market cap: $28.4 billion; Price-to-sales ratio: 3.6; SI Rating: Average) is the world’s largest fertilizer producer. The company operates six potash mines in Saskatchewan and one in New Brunswick. The reserves of five of these mines should last between 60 and 97 years. The other two mines have minimal or undetermined reserves. The stock hit an all-time high of $246 in June 2008, but fell to $62 last December. The drop was caused by lower prices for crops, which hurt demand for fertilizers like potash. As well, farmers in North America and Australia are seeing better-than-expected crop yields this year, even though they applied less fertilizer. This is mainly because of good weather and large amounts of residual fertilizer in the soil from last year....
China Investment Corp. (CIC) has caught a lot of investors’ attention recently with a string of big purchases of commodity investments in the resource sector. CIC is the Chinese government’s “sovereign wealth fund.” Sovereign wealth funds have been around since the 1950s. They are state-owned investment funds that are usually financed by an economic surplus. Many Middle Eastern sovereign wealth funds, for example, are financed by state oil revenues. CIC is directly funded by the Chinese government, largely with U.S. dollar reserves accumulated through exports.