Energy prices have been in a upward trajectory for quite some time. Heading into 2008, many on the street thought prices would correct; mostly due to a slowing economy and a terrible stock market. So far this year, both crude prices and natural gas have risen. In the case of crude oil, it ended the week at a new all-time high ($116/barrel). For the better part of two and a half years, I’ve been an energy bull. Currently, I still believe prices are going to go higher, albeit prices should correct at some point, only to regain these current high prices in the future.
For a little over a year and a half I’ve been a big proponent of Canadian energy trusts (CANROY’s as they are commonly called). During 2007, I held onto Canetic and Primewest and watched both companies be taken over at a nice premium. One of the buyers of Canetic was PennWest Energy Trust (PWE) (of which I currently own). So far this year, both PennWest and Pengrowth Energy Trust (PGH) have had excellent returns. It is my belief that CANROY’s in general will continue their nice run this year due in part to strong crude and natural gas prices in addition to beneficial industry fundamentals. Both of my holdings (PWE & PGH) benefit from not only strong crude prices, but higher natural gas prices). Currently natural gas is trading around $10.60 BTU’s. Many experts and me included believe natural gas prices will continue to rise this year, making the company’s income statement look even better.
Since the beginning of the year, PennWest shares have risen 18.88% (23.96% including distributions) and Penngrowth has seen its shares advance 12.61% (17.55% including distributions). Not bad for a market that even in the face of recent strength is still down for the year.
Investors in the past saw their returns greatly rocked due to Canadian rules governing how future tax issues will be dealt with. Just about two years ago the Finance agency of the Canadian government said that trusts will have to be taxed at current corporate rates, thus taking away their attractive trust tax shelter status. Since then however, many trusts have merged creating larger asset pools and even agreed to be taken over by foreign entities (PrimeWest was taken over by a Eastern concern). The pending tax changeover does not take shape till the end of 2010 but investors for the most part of still concerned about how these trusts will look heading into that time period. But value and income investors appear to have bid up these names mostly due to their attractive yields and healthy fundamentals.
Its my investing view that these asset plays are a wonderful way to play the energy markets. I’ve taken the stance that the price of oil will continue to rise in the years to come (on the aggregate-sell-offs will occur). With great energy assets coupled with a very attractive yield (PWE currently fetches a 13.2%, PGH 13.3%) these two holdings in addition to select other CANROYS are a great investment for long-term investors.
* Currently have a long position in PennWest & Penngrowth
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