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Aerial view of rock containing oil deposits on the banks of the Athabasca River near the town of Fort McMurray in Alberta. (MARK RALSTON)
Aerial view of rock containing oil deposits on the banks of the Athabasca River near the town of Fort McMurray in Alberta. (MARK RALSTON)

Schizas' Mailbag

Vermilion Energy Trust faces resistance at $36 Add to ...

Hello Lou.

Could we have your comments on Vermilion Energy Trust and how it will look at year's end when it converts to a corporation.

Doug and Irene in Kelowna, BC, Canada.

Hi Doug, Irene,

I have to tell you that at this time of the year I always think back to those few special summer days that I got to spend in Kelowna. Good on you for making the decision to make a healthy and livable community a part of your lives!

Vermilion Energy Trust will covert to corporation on September 1, 2010 and will maintain its payout at its current level generating a 6.7% yield. The company is well managed and has lots of opportunities to grow its reserves but as with all resource companies it lives and dies by the price they get for their production.

The three year chart clearly illustrates the the all time high that the units in the trust traded for back in 2008 when the price of oil reached its all time high. Funny how that works! We are a long way from $150 oil at this point so lets not get woozy on the upside potential of oil regaining and surpassing the highs. Rather lets protect the downside and let the upside take care of itself.

The units are currently testing support on the 200 day moving average but that's a good thing. Generally when we test support and continue trading higher it indicates that investors are willing to buy on pullbacks. What we can also see is that through 2010 VET.UN has met resistance at $36.00. The only thing that will move the units through $36.00 will be a significant boost in production, a good move to the upside for oil, or both.

The six month chart provides a view of the resistance at $36.00 and the support at $33.00. Honestly if VET.UN could settle into a trading range between $36.00 and $33.00 there would be nothing whatsoever wrong with that.

To the core of your question I think that the coversion of the units to stock in September has already been baked into the price.You can continue to enjoy the yield without a lot of concern that the market will sell off after the conversion. As mentioned what will move the stock one way or another are production growth or shortfalls and oil price movements.

Happy Capitalism!

Have your own question for Lou? Send it in to lschizas@globeandmail.com.

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