"Since tax changes on Canadian trusts were announced last October, their valuation premiums have vanished," notes Gavin Graham, contributing editor to Gordon Pape's The Income Investor.
And while the advisor notes that takeover speculation alone is not a reason to buy oil and gas trusts, he says, "It would not be unreasonable to wonder if a number of foreign oil companies aren't running their numbers on some of the large Canadian trusts."
One favorite, which he calls a "blue-ribbon energy trust" is Penn West Energy Trust (NYSE: PWE) -- one of the largest oil and gas trusts listed on the Toronto and New York stock exchanges. The firm is involved in gas, light crude, heavy crude, and oil sands operations in north-eastern British Columbia, Alberta, and south-western Saskatchewan.
He notes, "Penn West converted from a corporate structure 18 months ago and therefore has a long track record of proven delivery. It is run by Murray Edwards, one of the most successful Calgary-based oil entrepreneurs. Overall, we believe Penn West offers a good combination of current income and growth potential."
Gavin Graham also happens to be the the Chief Investment Officer for Guardian Group of Funds, and Penn West is one of the largest holdings in both of Guardian's monthly high income funds.
Overall, he notes that the trust's valuation of 5.6 times EBITDA -- compared to 6.6 times for large trusts and 7.7 times for intermediate E&P companies -- make it one of the more reasonably-valued opportunities.
The units, he explains, currently pay 34 cents a month ($4.08 a year) for a yield of 10.7% on the price of $38.06. The share price, he points out, has declined 10.4% since last October despite the fact that the trust has maintained its monthly distribution over that period.
He says, "Over the five years ending April 30, Penn West has given shareholders a total return of 199%, of which 136% has been capital appreciation and the remainder income. For US residents, the distributions were treated as 'qualified dividends' which means they were eligible for the low rate."
He concludes, "Penn West is suitable for investors who are prepared to accept the risks involved in the energy sector in return for an attractive distribution and growth potential."
For more stock picks from the leading financial newsletter advisors, visit Steven Halpern's free daily website, TheStockAdvisors.com.
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