The following from an energy guru on the change over from trusts to corps:
December 17, 2010
Please see disclosures on the final page.
Page 1
Canadian Income Trusts R.I.P.
Summary and Recommendation
A four-year adjustment period to tax change in Canada is now history. Six former trusts are repositioned to benefit from the broader stock market for corporations and a promising oil and gas outlook. Buy-recommended
Canadian Oil Sands Limited (COSWF) is lowest in McDep Ratio followed in increasing order by Enerplus Corporation (ERF), Penn West Petroleum Ltd. (PWE), Peyto Exploration and Development Corporation (PEYUF), Pengrowth Energy Corporation (PGH) and Freehold Royalties Ltd. (FRHLF)
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We change the names of six former trusts and place each into a peer group of North American stocks with similar characteristics (see Tables 1-4). The smallest of the six,
Freehold Royalties Ltd. (FRHLF), stays in the same Top Line Cash Payer group. It fits on the basis of high income, estimated at 8.5% for 2011, derived from percentage of revenue royalties on production by others. Next smallest Peyto Exploration and Development Corporation (PEYUF) moves to the Small Cap Independent Producer Group. Its dividend yield of 3.9%, half the previous distribution yield, still stands out and its low cost Deep Basin production is growing rapidly. Pengrowth Energy Corporation (PGH) and Enerplus Corporation (ERF) move to the Bottom Line Cash Payer Group where their dividend yields of 6.5% and 7.5% are competitive with the group median 7.4% distribution yield. Both are actively exploiting horizontal multistage fracturing to maintain production despite declining volume from reported proven and probable reserves. Penn West Petroleum Ltd. (PWE), Canada’s largest conventional light oil producer, moves to the Large Cap Canada Group in Meter Reader, a separate weekly analysis. Dividend yield of 4.8% is the highest of new peers while lowest adjusted reserve life does not yet include volumes expected to be unlocked with horizontal multi-frac. Our only stock listed in both large cap and income groups, buy-recommended Canadian Oil Sands Limited (COSWF), now appears only in the Large Cap Canada Group in Meter Reader
. A steep stock price decline this month accompanying a reduction in dividend yield to 3.2% has opened a McDep Ratio gap that we believe will be narrowed in 2011.
Kurt H. Wulff, CFA
