pengrowth

Pengrowth is down from its highs lately along with most other oil and gas trusts. However, we feel it has dropped enough to reflect today’s lower natural gas prices, ongoing volatility in crude oil markets and investor worries about further distribution cuts. Pengrowth is an attractive buy for the Resources component of your portfolio. PENGROWTH ENERGY TRUST $18 (Toronto symbol PGF.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 246.1 million; Market cap: $4.4 billion; SI Rating: Average) produces oil and natural gas from properties in Alberta and British Columbia. It also owns 8.4% of the Sable Offshore Energy Project, which extracts natural gas from several fields south of Nova Scotia. Oil accounts for 49% of Pengrowth’s production, while natural gas supplies the remaining 51%. Pengrowth focuses on high quality, mature properties that generate plenty of steady cash flows. It also prefers to replenish its reserves with acquisitions instead of exploration....

GENNUM CORP. $9.81 (Toronto symbol GND) earned $0.10 a share from ongoing operations in its third fiscal quarter ended August 31, 2007, down 16.7% from $0.12 a year earlier. Sales rose slightly, to $28.6 million from $28.4 million. That’s despite the stronger Canadian dollar, which cut revenue in the latest quarter by $1.8 million. Gennum is making good progress on its plan to sell less-profitable operations to focus on its higher-margin business, such as TV broadcasting equipment. The company continues to spend over 30% of its revenue on research, so it’s more profitable than it seems. It’s also debt free, and has $1.28 a share in cash. Buy. SHAWCOR LTD. $37 (Toronto symbol SCL.A) has won an $85 million U.S. contract to provide pipeline coating services to a liquefied natural gas facility in Western Australia. That’s small next to ShawCor’s annual revenues of over $1 billion (Canadian), but it enhances the company’s reputation in Australia. Buy. PENGROWTH ENERGY TRUST $18 (Toronto symbol PGF.UN) recently cut its monthly distributions by 10% to conserve cash for new projects and possible acquisitions. That will help replenish its reserves, which should last 10 years under current production rates. New hedging contracts also cut its exposure to volatile oil and gas prices. Pengrowth’s units still yield a high 15.0%. Buy.

PENGROWTH ENERGY TRUST $17.85 (Toronto symbol PGF.UN; SI Rating: Average) produces oil and gas in western Canada, as well as offshore Nova Scotia. Pengrowth’s average daily production of 89,633 barrels of oil equivalent is weighted 48% toward oil and liquids and 52% natural gas. In the latest quarter, the company’s average realized price for oil was $71.81 U.S. and $7.61 U.S. for natural gas. In the three months ended June 30, 2007, Pengrowth’s revenue rose 56.6%, to $444 million from $283.5 million, largely due to acquisitions. Cash flow per unit rose 29.1%, to $1.02 from $0.79....

The Alberta government is reviewing proposals aimed at raising royalties on oil and gas production. Some producers are outraged. But oil prices and revenues have expanded well above consensus forecasts, and the province wants its share. The increased royalties would represent a new cost for oil and gas trusts. But it’s just one element in their future profitability and cash flow. As well, any increases may be more than offset by further rises in oil and gas prices. ARC ENERGY TRUST $20.75 (Toronto symbol AET.UN; SI Rating: Speculative) produces oil and gas in western Canada....

FORDING CANADIAN COAL TRUST $32 (Toronto symbol FDG.UN; Aggressive Growth Portfolio, Resources sector; Units outstanding: 147.5 million; Market cap: $4.7 billion; SI Rating: Average) owns 60% of the Elk Valley Coal Partnership, which operates six coal mines in British Columbia and Alberta. Teck Cominco owns the other 40%, and manages the mines. Fording exports most of its coal to steelmakers in Asia. In the second quarter of 2007, Fording earned $0.72 a unit from continuing operations, down 24.2% from $0.95 a year earlier. Fording blamed the drop mainly on a 17% decrease in average coal prices. Revenue fell 9.0%, to $418.3 million from $459.8 million, and cash flow per share fell 22.6%, to $0.82 from $1.06. Despite the weaker earnings, Fording should be able to keep paying quarterly distributions of $0.65 a unit (8.1% yield). Its plan to focus on higher-quality coal may limit future volume growth, but should help it extract higher prices from customers. The recent sale of its industrial mineral operations also gives Fording cash to support the current distribution rate....

HARTCO INCOME FUND $3.96 (Toronto symbol HCI.UN) is a thinly traded investment in the highly cyclical computer equipment industry. We feel it could have trouble maintaining distributions. Sell. BOMBARDIER INC. $6.50 (Toronto symbol BBD.A) continues to win new orders for new aircraft, including a $334 million U.S. order for 10 new jets from U.S.-based Mesa Air Group Inc. That’s just a fraction of Bombardier’s annual revenue of $15 billion U.S., but deals like this enhance its standing with regional airlines. Bombardier’s new alliance with a Chinese aircraft company should also cut its development costs. Buy. LEGACY HOTELS REAL ESTATE INVESTMENT TRUST $12 (Toronto symbol LGY.UN) reached $15 in June as speculation grew regarding its “strategic review”, including a possible sale. However, Legacy moved down after it received several non-binding takeover offers worth about $12.60 a unit. Even if Legacy decides against a takeover, the review has helped draw attention to its high-quality hotels. Hold....

CANADIAN UTILITIES LTD. $47 (Toronto symbol CU) has raised its dividend each year since 1972. The new annual rate of $1.26 a share yields 2.7%. Thanks to higher electricity rates and gains from its natural gas storage operations, first quarter profits rose 57.4%, to $1.07 a share from $0.68 a year earlier. Buy. EMERA INC. $21 (Toronto symbol EMA) earned $0.36 a share in the three months ended March 31, 2007, down 10% from $0.40 a year earlier. A large industrial customer of subsidiary Nova Scotia Power recently resumed operations, which increased electricity sales. However, the extra revenue failed to cover the higher initial production costs. This a short-term setback, and should not hurt Emera’s $0.89 dividend, which yields 4.2%. Buy. PENGROWTH ENERGY TRUST $19 (Toronto symbol PGF.UN) paid out 92% of its cash flow in distributions in the first quarter of 2007, which is higher than comparable energy trusts. But that’s largely due to the timing of recent acquisitions. Pengrowth’s payout ratio in 2007 should average around 87%. It currently pays monthly distributions of $0.25 a unit (15.8% yield). Buy.

PENGROWTH ENERGY TRUST $19.26 (Toronto symbol PGF.B; SI Rating: Average) produces oil and gas in western Canada, as well as offshore Nova Scotia. In the three months ended December 31, 2006, Pengrowth’s revenue fell slightly, to $350.9 million from $353.9 million. However, cash flow per unit fell 45.8%, to $0.64 from $1.18. Pengrowth’s average daily production of 77,614 barrels of oil equivalent is weighted 50% toward oil and liquids and 50% natural gas. In the latest quarter, the company’s average realized price for oil was $60.35 U.S. and $7.12 U.S. for natural gas....

Our oil and gas trust recommendations have moved sideways since the start of this year, mainly in line with oil and gas prices. Oil is currently trading at around $65 U.S. a barrel, down from the record high of over $78 it reached in July of last year. Still, global demand for oil continues to rise. Oil prices are up from $60 at the start of this year, although they did fall to as low as $50 in January. Natural gas prices are now at around $7.80 U.S. per thousand cubic feet. That’s well down from the record high of $15.71 U.S. reached in December, 2005 in the wake of hurricane Katrina. It’s up from around $6.80 at the start of this year, but little changed since the end of January....

SAPUTO INC. $45 (Toronto symbol SAP) has paid $12 million for a UK-based maker of mozzarella cheeses. This is a tiny purchase compared to Saputo’s $4.6 billion market value. But acquisitions like this give Saputo a low-risk way to expand to new markets. Best Buy. FPI LTD. $15 (Toronto symbol FPL) has received permission from the Newfoundland government to try to sell some of its fish harvesting and processing assets. That helped prompt a 50% jump in FPI’s stock price in the past month. However, the stock could drop just as fast if a deal falls through, or political interference prevents FPI from extracting a higher price. Hold. PENGROWTH ENERGY TRUST $19 (Toronto symbol PGF.UN) has stayed in a narrow range for the past few months, mainly due to concerns over Ottawa’s intention to tax trust earnings in 2011. Fears that lower oil and gas prices would force Pengrowth to cut its $3.00 distribution rate (15.8% yield) have also weighed on the unit price. But we feel energy prices will remain steady in 2007. Even if Pengrowth cut the distribution 25%, it would still yield about 12%. Buy....