Many investors are unfamiliar with the world of energy trust investments, those peculiar corporate entities that buy up productive assets from oil and gas producers, package them and then resell them to investors looking for securities with higher payouts. Essentially, investors are buying a piece of the cash flow from those purchased assets – royalties on the wells, in this case – that are repaid to them by way of a dividend.
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An Investment Without Borders
These investments have become very popular in both Canada and the U.S. in the last decade. Below is a highlight of a number of the slickest names from both sides of the border.
Harvest Energy Trust (NYSE:HTE) collects revenues from properties mainly in Western Canada, though it operates a refinery in Newfoundland that produces 115,000 barrels a day. The shares pay a mighty 9.5% dividend (5 cents per share announced for the month of June, 2009) and trade with a very comfortable price/earnings multiple of just 4.5.
Harvest Energy stock is up over 100% in the last three months trade.
Zargon Energy Trust (OTCBB:ZARFF) trades 25% above its 52-week lows, but the payout on this trust is an eye-popping 13% annually (18 cents per share announced to be paid on July 15). And for those who doubt, Zargon is one of the few oil and gas trusts that saw in increase in its last dividend move. Zargon has maintained its current payout level for 43 months. The P/E on this oil exploration company is 4.5-times last year's earnings.
Drilling for Cash Dividends
Precision Drilling Trust (NYSE:PDS) has assets in the drilling business, including over 200 rigs in Canada, 150 in the U.S. and a few more operating in Mexico and Chile. In addition to the rigs, Precision Drilling supplies the camps with everything from catering to wastewater facilities. (To take advantage of all your investing options, you need to know them, read 20 Investments You Should Know.)
The trust is up nearly 200% from mid-March, when it traded for a mere $2, to stand currently at $5.50. Ironically, the move began directly after the trust suspended its monthly distribution, citing the need to shore up its balance sheet and more effectively meet its debt obligations. Precision Drilling trades with a P/E of 3.5.
Crescent Point Energy Trust (OTCBB:CPGCF) is an active Canadian acquisitor of oil and gas assets of all stripes. In just the last year, Crescent Point acquired four major companies or divisions, including their recent purchase of assets of Talisman Energy Inc. (NYSE:TLM) on March 4, 2009.
Crescent Point yields 8.40% annually and trades with a P/E ratio of 8.19. The trust's shares are up 75% since bottoming last December. Crescent Point was another in that elite group thats last move with the dividend was to increase it. (Unit investment trusts provide direct exposure to the energy sector, fueling better returns, for more see Investing In Oil And Gas UITs.)
Trust investments have to be understood before they're placed in a portfolio. But for those who can find a place for them, these energy-related royalty trusts offer great regular payouts and, if oil keeps rising, a chance for outsized capital gains.