Many energy trusts could be in trouble if lower natural gas prices persist, brokerage Peters & Co. Ltd. warned Wednesday, showing that spending at numerous firms to maintain production and pay distributions could exceed cash flow this year.
Peters analyst Jeff Martin did calculations for 19 trusts and found that on average the group could spend 25 per cent more than estimated 2006 cash flows just to pay distributions and cover maintenance capital, to hold oil and gas output steady.
That means the trusts need outside sources of capital to keep their business out of decline--or they might have to cut distributions.
Of the 19 trusts Peters looked at, PrimeWest Energy Trust was at the top of the scale, a chart showed, spending close to 70 per cent more on monthly payouts to investors and expenditures to hold production flat over its estimated 2006 cash flow.
Only one trust — Zargon Energy Trust — of the 19 was expected to spend less than cash flow on the two key items.
Mr. Martin said there could be pressure on capital spending and balance sheets this year, "particularly if lower natural gas prices continue throughout 2006." Gas prices have fallen about 50 per cent since a record high in December. Oil, however, remains strong and near record highs.
Money needed for maintaining production has been a controversial accounting question in recently. In early March, Standard & Poor's looked at 40 trusts across the spectrum and found the majority didn't subtract money needed for maintaining their businesses when they reported how much cash they had for distributions.
Energy trusts were particularly guilty, S&P said, noting that about 60 per cent of those the firm looked at generated enough cash to cover distributions after paying to hold production steady.
Debt is also an issue. Mr. Martin said he forecast both Provident Energy Trust and Ketch Resources Trust to have net debt to cash flow ratios of 2 or more at the end of the year, adding that the issue that in general should be closely monitored by investors. DAVE EBNER
Zyblock bullish on growth stocks
With corporate profit growth slowing in the U.S. and Canada, Myles Zyblock believes the time may be right for some investors to shift into growth stocks.
If that strategy sounds counterintuitive, says the chief institutional strategist at RBC Dominion Securities Inc., that's because many investors have misperceptions about growth stocks. Mr. Zyblock says many people still think of the high-flying names of the technology bubble when they think of growth. "Growth-stock investing, in my opinion, is not nearly as risky as people believe."
His research shows that when broad earnings growth is decelerating, the classic growth stocks are all the more valuable for their scarcity. "We're looking for earnings growth stability and that buys us some insurance against a generalized earnings growth slowdown," Mr. Zyblock says.
The strategist characterizes himself as neither a classic "value" or "growth" investor, but one who is always looking for profitable companies trading at decent valuations. "I want to buy a company that's growing and I don't want to overpay for that growth."
In Canada, companies that he finds attractive at the moment include Rothmans Inc., Saputo Inc., Finning International Inc., Canadian National Railway Co. and many of the big banks and insurance companies. Also on the list are TransCanada Corp., Toromont Industries Ltd. and Reitman's (Canada) Ltd.
He adds that growth and value investing each have their merits at different points in the cycle. CAROLYN LEITCH
63
