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Thanks in Part to its 11.1%
Yield, This Canadian Trust is Staging a Comeback |
Published:
June 6,
2007
Provident Energy Trust (NYSE: PVX) -- Like many of
its brethren, shares of this Canadian royalty trust are
recovering from their November 2006 lows.
As you may know, on October 31, 2006, the Canadian government
laid out proposed changes to the tax treatment of the country's
high-yielding royalty trusts. They said trusts would no longer
be able to avoid paying corporate income taxes but instead would
be taxed as ordinary corporations by 2011. The move would reduce
the cash flow that powers the double-digit yields that have made
these investments so attractive.
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Following the announcement, investors fled for the exit doors
and Canadian oil and gas trusts lost about -20% to -30% of their
market value. But now they're starting to turn around.
Provident, for instance, plunged from a close of $11.95 on
October 31st to a low of $9.00 following the announcement,
shedding -25% of its market value in just two days. In the past
few weeks, the shares have been trading at their previous
levels, hovering around $12.00.
A few factors are driving the shares higher. For starters,
investors are starting to realize that companies like Provident,
with solid fundamentals, can continue to support their rich
payouts for at least another few years. The company pays a
monthly distribution of about $0.11 per unit (the exact amount
varies with the Canadian/U.S. exchange rate). That equates to
$1.32 annually and gives the trust a yield of 11.1%.
With over half of its production from natural gas, the company
is leveraged to rising natural gas prices. But it's the
lucrative midstream (processing and transporting) business that
makes PVX so attractive. The company is one of only two Canadian
firms that controls the full natural gas production cycle (from
producing to gathering to shipping, storing, and marketing
natural gas liquids).
About 60% of the company's cash flow, which comes from natural
gas and oil production, depends on volatile commodity prices.
The balance comes from the midstream business, which churns out
relatively stable and predictable cash flow. Also, since
midstream profit margins improve when natural gas prices
decline, the company's diverse operations provide a natural
hedge against volatile natural gas prices.
The trust has continued to expand through acquisition. A few
weeks ago, it announced a $508 million deal to buy one of the
largest crude oil pools in Western Canada. The company says the
purchase would boost the trust's reserve base by about 40% and
be accretive to cash flow. Despite the aggressive acquisition
strategy, the trust maintains a healthy balance sheet, with a
debt-to-equity ratio of less than 1.0.
Speculation that trusts like Provident could become takeover
targets as we move closer to 2011 also may be pushing the shares
higher. For now, though, Provident has said it sees itself in a
strong position to acquire rather than be acquired. Only time
will tell.
Action To Take ---> For
yield-starved investors with a strong tolerance for uncertainty,
we believe Provident is one of the more attractive Canadian
income trusts.
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
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