Commodity Investor Q&A
With Matt Badiali
June 10, 2009
Q: What will become of Canadian oil trusts? Will they be bought out by foreign companies? – B.P.
A: The Toronto Stock Exchange lists 28 oil and gas companies under the trust designation (their symbols end in "–UN"). These Canadian Royalty Trusts or "CanRoys" are simply oil companies that adopted the trust business model to reduce their tax burden and increase payouts to shareholders.
Unfortunately for income-seekers, the Canadian government will put an end to the trust system in 2011, which makes the fate of these CanRoys uncertain...
Many CanRoys will revert to "normal" corporate status. Bonterra Oil & Gas, a small oil and gas explorer, converted back to a corporation in November. It yields 7.7%, but with the new tax structure, investors won't be able to pocket the whole dividend. One report suggests U.S. taxpayers will only keep about 70% of the yield.
I expect most CanRoys to undergo a corporate conversion like Bonterra's because it won't affect the day-to-day operations of finding and producing oil and gas.
Another possibility would be to quit paying dividends altogether, like Advantage Energy Income Trust. The company suspended dividends in March. This is a likely scenario for the smaller CanRoys, once they start paying corporate tax.
Finally, we might also see a few takeovers. The lingering uncertainty surrounding CanRoys has pushed prices down. Rising oil prices and low share prices could make it cheaper for large energy producers to buy CanRoy reserves rather than find them.
Penn West, one of the largest names in the sector, bought a small exploration company, Reece Energy, for $92 million. It was an instant double for Reece shareholders.
Investors interested in dividends can still find them with CanRoys, as long as you figure in a discount for tax. Even now, five of the 28 companies have yields in the double digits. And if oil holds around $70 per barrel, these companies should be able to increase payouts at the end of this quarter.
Q: MLPs and royalty trusts are an attractive source of income for retirees, but we really need to do our homework on each individual equity before purchasing. Is there a reliable source of information on what constitutes good investments in this sector? – D.B.
A: If you'll forgive a quick plug, D.B., the folks at Stansberry Research are way ahead of you. I cover the energy sector, including the occasional MLP, in the S&A Oil Report. And my colleague Tom Dyson writes a monthly income advisory – The 12% Letter – that also features MLPs and other high-income plays.
And of course, we periodically cover MLPs here in the Q&A. (If you've got a specific question, drop us a line.)
But you hit on one important point – doing your homework before you invest. If we're going to earn interest, we want to make sure the company will be around to pay off...
First, check to see if the company is healthy by looking at the net profit. That's the bottom line, and it's where the dividend comes from. If the company doesn't make any money, move on. Second, take a look at the how much debt the company carries and how much interest the company pays on that debt. If it pays out most of its income in interest payments, move on.
You can get all that information from your broker, the company's website, or sites like Google Finance and Yahoo Finance. The information is free and easily accessible.
As you do your research, you'll find that a lot of oil companies fell into the trap of last year's high prices. They paid far too much money for assets at the top of the market...
For example, Atlas Pipeline Partners (APL), a $340 million natural gas pipeline MLP, yields 33.7% based on its trailing 12-month dividend payouts. But the company is strangling under a huge debt. It borrowed $1.5 billion (mostly in 2007) when times were good. Now its businesses can't generate enough money to cover interest payments. The company's future is in serious doubt. APL would make a terrible investment for a retiree, because you could lose your principal if the company goes under.
On the other hand, there are MLPs like Martin Midstream Partners (MMLP), a $300 million marine terminal and storage company. This company has just under $300 million in debt. However, unlike Atlas, it has a healthy business. Last quarter, it paid its debts and still gave shareholders $4.8 million. Its current yield is nearly 15%.
As with any company in the oil patch, there is still risk. But low-debt MLPs make great investments for safety-conscious income seekers. That's how I approach my homework, and I hope it helps with yours.
Good investing,
Matt Badiali |
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| • |
Copper soars 60% since January 1... up another 3% yesterday as Chinese vehicle sales increased. |
| • |
TiVo up 57% in one week... the digital recorder firm nears six-year highs. |
| • |
Data-storage company STEC hits a new high... up 100% in a month. |
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Earnings today... Brown-Forman, Isle of Capri Casinos. |
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Last |
Change |
52-Wk |
| S&P 500 |
946.16 |
+0.75% |
-30.52% |
| Oil (USO) |
38.23 |
+1.84% |
-64.94% |
| Gold (GLD) |
93.75 |
+0.20% |
+6.55% |
| Silver (SLV) |
14.97 |
+1.42% |
-11.65% |
| U.S. Dollar |
80.83 |
+0.18% |
+11.72% |
| Euro |
1.41 |
+1.42% |
-9.90% |
| VIX |
28.07 |
-5.71% |
+21.41% |
| HUI |
368.08 |
+0.26% |
-15.00% |
| 10-Year Yield |
3.89% |
0.00 |
-0.10 |
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| Company |
Sym |
Industry |
Wonder Auto |
WATG |
auto parts |
Alliance |
ALNC |
bank |
Orrstown |
ORRF |
bank |
Insmed |
INSM |
biotech |
SIGA Tech |
SIGA |
biotech |
Caribou Coffee |
CBOU |
coffee |
American Dairy |
ADY |
dairy |
STEC |
STEC |
data storage |
TiVo |
TIVO |
electronics |
Bridgepoint |
BPI |
for-profit ed |
Sanderson Farms |
SAFM |
meat products |
ICU Medical |
ICUI |
medical devices |
Rubicon |
RBY |
minerals |
Allied Nevada |
ANV |
mining |
Keegan |
KGN |
mining |
3Com |
COMS |
networks |
Calumet |
CLMT |
oil & gas |
VistaPrint |
VPRT |
online printing |
P.F. Chang's |
PFCB |
restaurants |
AEP Industries |
AEPI |
rubber & plastics |
NVE |
NVEC |
semiconductor |
Descartes |
DSGX |
software |
Synaptics |
SYNA |
software |
ShoreTel |
SHOR |
telecom |
Tellabs |
TLAB |
telecom |
Universal Travel |
UTA |
travel agency |
Spartan Motors |
SPAR |
trucks |
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| Company |
Sym |
Industry |
Pacific Capital |
PCBC |
bank |
OSI Pharma |
OSIP |
biotech |
Western Goldfields |
WGW |
mining |
Mitsui |
MITSY |
conglomerate |
Tower Bancorp |
TOBC |
bank |
Bank of Kentucky |
BKYF |
bank |
Santos |
STOSY |
oil & gas |
Frisch's |
FRS |
restaurants |
Susquehanna |
SUSQ |
bank |
Retalix |
RTLX |
software |
Pharmaxis |
PXSL |
pharma |
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