pengrowth

Our oil and gas trust recommendations hit record highs in 2007 and 2008, mainly in line with soaring oil and gas prices. In mid-2008, oil hit a record peak of $147 U.S. a barrel. Natural gas prices reached as high as $14 U.S. per thousand cubic feet. Oil and gas stocks have fallen since those highs. Oil is currently trading at just $43 U.S. a barrel. Natural gas prices are now at around $5.87 U.S. per thousand cubic feet. We still advise against over-indulging in oil and gas trusts or stocks, and we’d continue to confine investments to well-established companies or trusts that can survive during the inevitable price setbacks....

PENGROWTH ENERGY TRUST $10.09 (Toronto symbol PGF.UN; Shares outstanding: 254.6 million; Market cap: $2.6 billion; SI Rating: Average) produces oil and gas in western Canada, as well as offshore Nova Scotia. Pengrowth’s average daily production of 80,981 barrels of oil equivalent is weighted 49% toward oil and liquids and 51% natural gas. In the three months ended September 30, 2008, Pengrowth’s revenue rose 23.3%, to $518.7 million from $420.7 million. Cash flow per unit rose 23.6%, to $1.10 from $0.89....

These three trusts now trade at low multiples to cash flow based on the 12 months to September 30, 2008. However, oil and gas prices have fallen sharply since the end of the third quarter, which will cut their cash flow in the fourth quarter. This trend will likely continue into next year. Nevertheless, with their reasonable debt and low payout ratios, all three are well-positioned to withstand lower prices. ARC ENERGY TRUST $18.72 (Toronto symbol AET.UN; Shares outstanding: 215.3 million; Market cap: $4.0 billion; SI Rating: Speculative) produces oil and gas in western Canada. In the three months ended September 30, 2008, ARC’s revenue rose 61.8%, to $485.7 million from $300.2 million. Cash flow per unit rose 36.5%, to $1.16 from $0.85. The rise in cash flow came largely from higher oil and natural gas prices. ARC’s average daily production of 64,325 barrels of oil per day equivalent is weighted 50% toward oil and 50% natural gas....

PENGROWTH ENERGY TRUST $11 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 254.9 million; Market cap: $2.8 billion; SI Rating: Average) produces oil and natural gas from, mainly from properties in Alberta and British Columbia. It also owns 8.4% of the Sable Offshore Energy project, which extracts natural gas from several offshore fields south of Nova Scotia. Natural gas accounts for 60% of its production, while oil supplies the remaining 40%. Pengrowth is down lately, along with most other oil and gas producers, due to falling energy prices. However, Pengrowth’s cash flow seems sufficient to let it keep paying monthly distributions of $0.225 a unit. That gives it a high current yield of 24.5%. Pengrowth paid out 62% of its cash flow as distributions in the latest quarter, down from 79% a year earlier. In the three months ended September 30, 2008, Pengrowth’s earnings soared to $1.69 a unit (total $422.4 million) from $0.66 a unit ($161.5 million) a year earlier. Most of the increase came from unrealized gains on oil and natural gas hedging contracts. Cash flow per unit rose 23.6%, to a record $1.10 from $0.89. Revenue grew 23.3%, to $518.7 million from $420.7 million. A 27% rise in realized energy prices more than offset a 5% drop in average daily production....

We recommend few income trusts. That’s because most trusts involve substantial risk, such as focusing on a single commodity or geographic area. Here are four trusts we do see as buys. Despite Ottawa’s plan to start taxing trust distributions in 2011, they should continue to pay above-average yields for years to come. These four trusts should also appeal to BCE investors seeking new sources of income, assuming that the BCE privatization goes through as planned (see box this page). However, you should continue to limit income trusts to no more than, say, 15% of your total portfolio....

As I’ve said several times in the past few weeks, you can only spot a market bottom (a reversal in a falling trend in stock prices) in hindsight. Then too, a market can hit bottom, put on a healthy bounce, then go back down to the bottom once again before going on to a lasting rise. But I do feel that a lot of the risk of further decline is now out of the market. My view is that stocks are likely to move substantially higher in the next 6 months to a year, if not sooner. TERANET INCOME FUND $10.10, Toronto symbol TF.UN, has declined to comment on the new takeover offer of $10.25 a unit from the Ontario Municipal Employees Retirement System (OMERS). The new offer is 6.8% below OMERS’ original offer of $11.00 a unit. OMERS dropped its higher bid mainly due to the slowing Ontario economy and falling real estate values. That could hurt demand for Teranet’s electronic land registry services. Meanwhile, Teranet will pay a cash distribution $0.0225 a unit on November 17, 2008. This partial monthly payment will cover the period from November 1, 2008 to the expiry of the OMERS offer on November 10, 2008....

FORDING CANADIAN COAL TRUST $85 (Toronto symbol FDG.UN) continues to trade below Teck Cominco Ltd.'s takeover offer of $82.00 U.S. in cash plus 0.245 of a Teck class B subordinate voting share. The offer is now worth $97.27 per Fording unit. The deal should close on October 30, 2008. As we recommended in August, 2008, you should sell your Fording units if you hold them outside of an RRSP. If you hold them in an RRSP, you should tender your units to Teck. NORTEL NETWORKS CORP. $1.79 (Toronto symbol NT) has cut its revenue and earnings outlook for 2008, due to slowing demand for telecommunications equipment, unfavourable foreign exchange rates and delays delivering certain products. Sell from your aggressive portfolio. PENGROWTH ENERGY TRUST $11 (Toronto symbol PGF.UN) has moved down lately along with oil prices. Lower prices could prompt Pengrowth to cut its monthly distribution of $0.225 a unit (24.5% yield). Even if the trust cut the rate in half, the units would still yield over 12%. Buy for your aggressive portfolio....

Pengrowth Energy Trust $17 (Toronto symbol PGF.UN Aggressive Growth Portfolio, Resources sector; Units outstanding: 248.3 million; Market cap: $4.2 billion; SI Rating: Average) has agreed to acquire Accrete Energy Inc. for $95 million in new units. The purchase price is equal to 35% of Pengrowth’s second-quarter cash flow of $267.9 million or $1.08 a unit. Accrete’s properties in the Harmattan region of Alberta will increase Pengrowth’s daily oil production by 6%, and its oil reserves by 3%. We generally downplay companies that rely on acquisitions for growth. But Pengrowth’s focus on proven properties that immediately add to its cash flow cuts this risk. Pengrowth is a buy for aggressive investors.

PENGROWTH ENERGY TRUST $17 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 248.3 million; Market cap: $4.2 billion; SI Rating: Average) has agreed to acquire Accrete Energy Inc. for $95 million in new units. The purchase price is equal to 35% of Pengrowth’s second-quarter cash flow of $267.9 million or $1.08 a unit. Accrete’s properties in the Harmattan region of Alberta will increase Pengrowth’s daily oil production by 6%, and its oil reserves by 3%. We generally downplay companies that rely on acquisitions for growth. But Pengrowth’s focus on proven properties that immediately add to its cash flow cuts this risk. Among royalty trusts, Pengrowth is a buy for aggressive investors.

PENGROWTH ENERGY TRUST $18 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 247.9 million;Market cap: $4.5 billion; SI Rating: Average) owns oil and natural gas properties in Alberta and B.C. Pengrowth prefers to focus on mature, proven properties that provide it with steady cash flows. At current production rates, Pengrowth’s reserves should last 10 years. The trust tends to replenish its reserves with acquisitions instead of exploration. However, it typically pays with new units, which...