Friday, August 25, 2006
Harvest Energt Trust (HTE) has been on my radar screen for several months. This year, the price action has been fairly quiet. Yearly high is 32.70 (Jan 23) and low is 26.05 (Jun 13). For the past two months, the trading range has been 31.15 (Aug 11) and 28.31 (Jun 23). Quick math results in a mean price of about 29.55 (using just the highs and lows for the two periods combined). At 29.55 and the current distribution of approximately $4.05 yearly, the pre-tax yield was about 13.7%. This was a very high yield even for Canroys. A "normal range" would be closer to 8-10%.
When HTE closed at 30.41 on Tuesday (Aug 22), it had a yield of about 13.3%; but to me there was no real story or "growth driver" for the next 2-3 years...other than potentially higher energy prices. The other Canroys and US e+p stocks have this going for them. (After initially trading lower after the announcement, HTE rebounded Thursday and Friday to close the week @30.74 .)
Harvest Energy Trust (www.harvestenergy.ca) changed its stripes on Wednesday morning. Instead of (just) being an oil and gas trust, Harvest is going to become an intergrated energy trust. Two questions came to mind: (1) Is refining a good business for at least the next 5-10 years, and (2) Is the price reasonable?
Much has been posted both pro and con on this transaction. The refinery being purchased has had a checkered past; however, Vitol (which is more of an energy trading company) has rebuilt and upgraded the refinery over the past twelve years. The North Atlantic refinery at Come By Chance, Newfoundland is a 115,000 barrel per day (bpd) moderately complex refinery. I could not find the complexity number; however, the North Atlantic Refining site listed the abitity to process various qualities of sour crude at 79% (http://www.na-refining.nf.ca/about.asp). The HTE webcast discussed the high quality of gasoline and diesel produced at the refinery and that most high valued refined products are shipped to New England and New York.
I want to take some time and look at the cost of this refinery compared to the market cap + long term debt of a few US refiners, the cost of Valero's 2005 buyout of Premcor, and the recently announced purchase of CITGO share of the Lyondell-CITGO refinery in Houston.
Frontier Oil (FTO), which I follow, has been steaming this year. FTO closed @35.63 on Friday, +90.2% TYD. Holly Corp. (HOC) at 50.08 is currently +70.6% YTD and Giant Industries (GI) at 71.79 is +38.2% YTD. Refining has been and IMO will be a very good business for the foreseeable future.
I did a simple analysis of the market cap plus long term debt compared to the refining capacity for these three smaller US refiners. Granted, we do not have an apples-to-apples comparison. The refiners have different complexity levels, produce different refined products for various markets, and have different additional assets (pipelines, service stations, etc.).
The results: HOC's cost/value per barrel per day (bpd) is $26,852; FTO's is $25,611; Lyondell's purchase of CITGO's 41.25% interest in their joint refinery is $18,996; and GI's is $12,936. Valero's reported $8B purchase of Premcor (four refineries and 790,000 bpd capacity) last year worked out to $10,126 per bpd. (Note: Premcor had limited other assets.) VLO's full company numbers are about $13,209 per bpd.
Harvest Energy is paying C$1.6B (or about US$1.44B) for the 115,000 bpd refinery plus 69 service stations and a home heating business servicing 20,000 residential and commercial customers in Newfoundland. That works out to about $12,522 per bpd of refining capacity (not counting the other assets).
It should be noted that CITGO's share of the Lyondell-CIGO refinery equates to 110,550 bpd, or slightly less than HTE's purchase of the North Atlantic's 115,000 bpd refinery. Yet, the reported cost at $2.1B vs. (HTE's of) $1.44B is 45.8% higher. And, Lyondell is getting virtually no other assets (that I could find).
Bottom line: After following the refining sector for more than two years, looking at the numbers, reading the reports, and listening to the conference call (with comments about the number of technical and financial advisors to HTE), IMO, Harvest Energy Trust now has pizzaz. I am adding HTE to my follow list. As always, please do your own due diligence including reading the annual and quarterly reports. Stocks/trusts discussed are not recommended for short term trading.
Disclaimer: Long HTE
Next post due: Monday, Sep. 10. (I will be on the road for 11 days. Posts will depend upon sector news and internet access.)
Monday, August 21, 2006
Five for Five
Very nice day for crude oil, the refiners, and our three Canroys. WTI crude closed @ 72.45, +1.31. VLO was +0.86 (+1.4%) to 62.70; FTO was +0.96 (+2.8%) to 34.95; BTE was +0.75 (+3.1%) to 23.94; CNE was +0.39 (+1.9%) to 20.93; and PWE was +0.95 (+2.35) to 41.75.
Refinery Industry Fundamentals
I have reviewed the industry fundamentals as posted on the Valero web site today. The WTI less Maya discount was 14.00 last week, down from the all time high of 17.38 in June. Gasoline crack spreads vary widely by region. All are down from the May-Jul period. On the Gulf Coast, the (conventional 87) gasoline spread is down to 11.83 from a high of 22.89 in July; however, the GC diesel spreads are near record highs. In Mid-Continent, the gasoline spread is near a high at 20.29 and on-road diesel is at a record 33.87. Northeast and West Coast results are also mixed. Both are near records for diesel but down 30-40% from record highs earlier this year for gasoline. However, the gasoline spreads still remain above the 2005 average for all four regions and are almost double (05) for Mid-Continent.
Bottom line: Valero Energy (VLO) and Frontier Oil (FTO) should have strong Q3 earnings. They should at least be plus or minus 10% from record Q2 results. I'll have more on earnings estimates in mid-Sep.
Another Canadian Trust to Consider
Want to wrap up today by introducing a little different type of Canadian enery trust. I'll list it under the Canroy heading; however, Precision Drilling Trust (PDS) is an energy services trust.
PDS (www.precisiondrilling.com) converted from a company to a trust last November. The one year chart reflects an almost C$20 dividend at the time of the conversion. Since PDS has been a trust, the trading range has been 37.05 (today) - 25.77 (Nov05). Current distribution is C$0.31 per unit with the ex-distribution date of Aug 29 and the pay date of Sep 15. Current estimated pre-tax yield: 8.9%.
Earnings estimates for 06 and 07 are in the 3.90-4.05 range. Precision provides drilling services in Canada and recently established operations in the US. The diversification into the US helps both geographically and seasonally. Because of spring breakup, Q2 is typically a slow quarter for Canadian drillers. The US operations should help smooth out quarterly results and provide more growth opportunities.
LATE UPDATE: On Tuesday, Aug 22, PWE announced its ex-distribution date of Aug 29 (you have to buy and own through Monday, Aug 28) and pay date of Sep 15 for the C$ 0.34 per unit distribution (this is about $ .30 at the current exchange rate).
Disclaimer: Long VLO, FTO, BTE, CNE, PDS, and PWE.
Next post due: Sunday August 27.
Sunday, August 20, 2006
Refiners and CANROYs - Weekly Update
Total returns since Mar 31, 2006, are better: BTE +37.8%; PWE +13.1%; and CNE +2.2%. Comparisons are not meaningful prior to Mar 31 because BTE became NYSE listed on Mar 27 and CNE was formed with the merger of Acclaim Energy Trust and Starpoint Energy Trust and first listed on the NYSE in early January.
Baytex Energy Trust (C$ 0.18) and Canetic Resources Trust (C$ 0.23) have announced their Sep distributions with an ex-distribution date of Aug 29 and a pay date of Sep 15. I have not seen the distribution announcement for Penn West Energy Trust; however, C$ 0.34 with similar ex-distibution and pay dates are expected. This should be announce early this week. Note: Cash distributions can be 1-3 days late being posted in brokerage accounts. Some trusts and brokerages are more prompt than others.
For the week, the refiners were..pardon the pun...weak. Valero Energy (VLO), the largest refiner in North America, closed Friday at 61.84 (-6.9% QTD and +20.3% YTD). Frontier Oil closed at 33.99 (+4.9% QTD and +81.5% YTD). IMO, VLO and FTO should have excellent Q3 results and the price per share (pps) for them should be rewarding through early February (Q4 earning release). If meaningful, I may post a short update on the prices, spreads, and discounts on Monday evening.
One question for investors is how much "energy" should be in their portfolio? For some the answer is zero. For some in the energy field the answer is north of 80%. Currently, the energy componet of the S+P 500 is about 9-10%. That is a fair starting point for a typical investor. For an energy aggressive investor, 30-60% would give superior potential with moderate to high risk.
A lot depends upon one's outlook for energy over the next 3-5 years and beyond. In order, I like the CANROYs, US refiners, and US (middle to smaller) exploration and production companies. The CANROYs offer several advantages: (1) A cash flow stream while you wait for potential capital gains, (2) An investment in sector (energy) which IMO will continue to gain in importance, and (3) An investment in Alberta...an area that has become (almost) vital to the United States. Ask yourself, what is the most politically stable foreign source for petroleum feed stocks and products? The answer is Canada, and Alberta is the hot bed of Canadian oil and gas development.
I may add coverage of one or two US e+p companies and one or two more Canroys within the next month. I do not plan to cover more than 8-10 stocks at one time. Readers are encouraged to reseach companies discussed and other companies in the energy industry.
Disclaimer: Long BTE, CNE, PWE, FTO, and VLO.
Next expected post: Sunday August 27.
Tuesday, August 15, 2006
CANROYs - Three Interesting Trusts
The following is taken from the Baytex Energy Trust web site. There are five important features that distinguish (Canadian) income trusts from operating companies:
(1) Flow-through entity under Canadian tax code
(2) Equity owners hold trust units
(3) Distribute a significant portion of cash flow to unitholders (50 to 100+%)
(4) Distributions (usually) declared and paid monthly
(5) Income trusts are typically non-taxable at the corporate level
It should be noted that US residents are taxed at 15% by Canada; however, currently, this is mostly off set due to two factors. First, most distributions are treated like qualified dividends (maximum tax rate 15%) or sometimes as a (partial) return of capital. Also, the foreign tax paid can generally be counted dollar-for-dollar as a tax credit (in taxable accounts). Above $600 of foreign tax paid, there are limits; however, they are fairly liberal if a taxpayer has significant taxable income. This is not as complicated as it sounds. Off the shelf tax software easily handles this task.
BAYTEX ENERGY TRUST (BTE-NYSE)
BTE (23.35) is currently yielding 8.2% (pre-tax) on a current monthly distribution of C$.18. (Example of the US distribution using a .88 conversion rate: .18 x .88 = .1584 x .85 = .13464. This could generally be considered the after tax return.)
Baytex Energy Trust (www.baytex.ab.ca) has a production of approximately 35,000 boe/d. The production is mostly heavy oil with a approximate weighting of 67% oil and 33% natural gas. It was first listed on the NYSE on April 3, 2006. Total return from 4/3/06-6/30/06: +24.8%. Total return Q3 thru 8/15: +8.4%.
CANETIC RESOURCES TRUST (CTE-NYSE)
CTE (20.37) is currently yielding 12.0% (pre-tax) on a monthly distribution of C$.23. Current production is in the 72,000-74,000 boe/d range. On Aug 2, CTE announce the pending acquisition of a private company. The purchase price was announced as $900 million for a production of approximately 13,500 boe/d.
Canetic Resources Trust (www.canetictrust.com) was formed on Jan 5, 2006, by the merger of Acclaim Energy Trust and Starpoint Energy Trust, and subsquently listed on the NYSE. Total return Q2: +2.5%. Total return Q3 thru 8/15: -1.2%. (Note: CTE has only a seven and a half month history; however, several leading Canadian trust income funds held 3-4% positions on Mar 31. Canetic also has stated that they will actively seek acreative acquisitions.)
PENN WEST ENERGY TRUST (PWE-NYSE)
PWE (www.pennwest.com) is currently yielding 8.8% (pre-tax) on a monthly distribution of $C.34. Current production is rated at approximately 135,000 boe/d. Penn West closed the acquisition of Petrofund Energy Trust (former symbol: PTF) on 6/30. Last night (8/14), PWE announced Q2 earnings. These figures did not include production from Petrofund. It may take a quarter or two to get a real handle on the financials; however, a number of Canadian portfolio managers have stated on ROB-TV (Report on Business-TV) that Penn West is the best balanced oil and gas trust.
Total return Q2: +10.6%. Total return Q3 thru 8/15: +2.3%.
SUMMARY: These are three of a number of Canadian oil and gas trusts which seem to have solid yields, defensive qualities, give Form 1099s, appear to be "US investor friendly", and show good growth potential. Hopefully, this newsletter will wet your interest to do your own research into these unique equities. Note: All three of these trusts paid August distribution today and will have ex-distribution dates in about 10 days for the September payments.
Disclaimer: Long BTE, CNE, and PWE.
Next expected post: Sunday Aug. 20.
Sunday, August 13, 2006
CANROYs: The Basics
Currently, there are some 240 Canadian trusts and energy is one of the leading trust sectors. Now, it gets a little complicated. I'll try to discuss the basics: the things you need to know BEFORE considering investing in CANROYs.
Why CANROYs versus U.S. energy trusts or REITs? There are many differences between Canadian and U.S. energy trusts. U.S. trusts are formed, obtain leases, drill, and produce; however, they can not expand by buying new properties or buyout other companies or trusts. As a result, there is a built in depletion and a finite life to the trusts. Also, U.S. trusts are usually MLPs which means you get a K-1 each year instead of the much simpler Form 1099.
On the other hand, CANROYs are trusts in name but function very much like operating companies. They can buy and sell properties, merge to form larger trusts, and buyout smaller trusts. They use a significant portion of their cash flow to support and expand operations. Usually, 50-90% of cash flow is returned to the unitholders in the form of monthly (or in a few cases quarterly distributions). With proper management, Canadian trust can be very long lived. Quality of management is important in considering trusts just like it considering investing in operating companies or mutual funds. In taxable accounts, REITs have a major disadvantage in that they are not considered qualified dividends and are taxed as normal income.
CANROYs are sort of like animals. Some are big, some are small; there are many differences that need to be considered. I'll take some time now to look at some of the basics.
(1) Ten of the largest CANROYs are duel listed (listed on the NYSE and the TSX. Another twenty larger CANROYs are listed on the Toronto Stock Exchange (TSX) and some of these are traded in the U.S. pink sheets. Just because a trust is duel listed does not make it a better investment; however, it can be easier to trade and follow on a real time basis. (This really varies with the U.S. broker that you use.) I primarily concentrate on duel listed CANROYs; however, a few of the TSX (single) listed trusts are worthy of consideration (if the investor is comfortable with investing in TSX listings or in the pink sheet versions).
(2) Most of the CANROYs are setup to give a Form 1099 to give tax status for distributions. A few, PGH is one, give a K-1. This can be a major consideration when selecting a trust investment. Personally, I avoid K-1 gives in taxable accounts. Some qualified investors report benefits of holding K-1 givers in taxable accounts. Investors should discuss all tax reporting considerations with their tax advisor.
(3) Most duel listed CANROYs and a number of TSX listed trusts are what I would call "U.S. investor friendly" in that they either provide detail numbers (taxable distributions, return on capital, etc.) or percentages for U.S. investors to report their taxes correctly. This is not that complicated; however, the taxability and return of capital (if any) are very important. A log for each CANROY should be established and updated when details are released yearly (usually early March). I do not recommend investing (in a taxable account) in any CANROY which does not appear to be U.S. investor friendly AND does not provide understable (tax related) distribution information. All the duel listed and some of the TSX listed trusts seem to currently provide this basic information.
(4) CANROYs vary widely in the nature of their businesses. Most are in the oil and gas production sector. Trusts which are more than 55% gas (on a boe basis) are commonly called "gassy" or "gas weighted" and those that are more than 55% oil are called "oily" or "oil weighted." Some are roughly equally weighted. A few trusts are in the services business, both drilling and general oil and gas field services.
(5) Oil and gas trusts are also characterized as conventional and non-conventional. Conventional refers to the more traditional oil and gas drilling. Non-conventional refers to trusts that are primarily into oil sands and coal bed production. This is not clear cut because some "conventional" trusts (ie. PWE and BTE) are starting to get into oil sands and other new technologies.
(6) Five other major considerations when looking at a trusts : What is their distribution yield, distribution history, sustainability (ability to maintain or increase distributions in the future), payout ratio of cash flow generated, and are the distributions purely from cash flow or are they supported with return of capital or borrowings?
Now for the good news, leading CAROYs are currently paying 7-13% annual distributions and have the potential for substantial capital gains and distribution increases. I strongly recommend that potential investors read the last annual and recent quarterly reports for all trusts which are being considered and maybe a few others, too. After reading the reports, you should have a better understand which trusts are set up for for the benefit of the unitholders. Some appear to be more unitholder friendly (less dilution history, significantly management owned, project a unitholder friendly attitude, etc.).
I can not overstress the need to do your due diligence (DD). DD should be done on all investments; however, it is especially important in the case of CANROYs because there are such major differences in trusts and they are better considered (longer term) investments rather than short term trading vehicles.
One final point for this post: CANROYs are about the only place you can find fixed income level yields, are generally taxed at only 15% (more on this next week), and have a history and potential for significant capital gains. IMO, quality CANROYs are an excellent addition to an equity portfolio and are also good as a substitute in a fixed income portfolio.
Next post due: Sunday Aug. 20th.
Tuesday, August 08, 2006
Time to Get Started
Valero Energy (VLO) is the largest independent refiner (maximum capacity 3.2 million pbd) in North America. It closed today @ 66.89, +0.51 (+0.8%) and is up 30% YTD (on a total return basis). Valero has 18 refineries in the US, Canada, and Aruba. On Tuesday Aug. 1, VLO reported earnings per share of 2.98. This was the best quarter in the company's history and brought ttm eps to 8.49. Over the past two years, Valero Energy has been the fastest growing stock in the S+P 500; however, with a ttm PE of only 7.9 ... I believe it will continue to grow at a rate far superior to broad market averages over the next 6 to 12 months. My target price is 80 by mid Feb 07.
Frontier Oil (FTO) is one of the fastest growing smaller refiners. Frontier has two refineries: a 52,000 bpd refinery in Cheyenne, WY and a 110,000 bpd refinery in El Dorado, KS. FTO reported record quarterly earnings yesterday (Aug 7) of 1.26 vs 0.59 for Q2 last year. Current ttm EPS is 3.19 and PE is 11.5. The CEO stated in the Q2 conference call that they had a record July, August was starting out very strong, and analysts need to increase estimates for Q3 and 06. FTO closed today @ 36.75, +2.25 (+6.5%) and is now +96.2% YTD. My target price is 50 by mid Feb 07.
Over the weekend, I expect to give initial coverage to three Canadian energy trusts (BTE, CNE, and PWE). Over time, coverage may expand to as many as five US energy stocks and five Canadian energy trusts. In my opinion, both of these areas offer savy investors excellent opportunities for the next 5-10 years.
I expect to update this site most weekends and, as time premits, occasionally during mid week. So till next time, you might want to get familiar with the stocks and trusts mentioned tonight. Good luck and God bless.