November 16, 2006: Canadian Royalty Trusts: Oversold?

Sometimes, the market just becomes totally inefficient in a sector. I believe that the Canadian Royalty Trusts in oil and gas are grossly oversold and should be considered for purchase for mildly speculative monies as a pure dividend play. When yields are approaching 18% or more, I took notice.

A well respected analyst in Canada reported the following with potential scenarios for the trusts in political terms:

1. Canadian tax laws are changed exactly as proposed by the Prime Minister, eliminating tax advantaged status in 2011:45% chance. This is a worst case scenario for oil and gas trusts, but still means the stocks are oversold now on a comparative basis.
2. Tax laws are changed as proposed but existing energy trusts ar exempted: 45% chance. This is nirvana if you buy trusts now with their savaged price.
3. Tax laws are changed as proposed for new trusts, but ALL existing trusts are exempted: 5% chance.
4. Tax laws are changed as proposed but the grace period would be extended past 2011:45% chance.

I like those odds for a conservative speculation.

Here are the Canadian Royalty Trusts listed on U.S. stock exchanges:

Advantage Equity Income (AAV)
Baytex Energy Trusts (BTE)
Canetic Resources Trust ( CNE)
Enerplus Resources Fund (ERF)
Harvest Energy (HTE)
Pengrowth Energy Trust (PWE)
Penn West Energy Trust (PWE)
Prime West Energy Trust (PWI)
Provident Energy Trust (PVX)

There are over twenty five oil and natural gas trusts on the Toronto exchange. I have the complete list. Our international readers can e-mail me for this list. I will see that you receive it promptly.