The Little-Known Energy Stock Yielding 9.5%
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By:
Carla
Pasternak Editor, High-Yield Investing Learn more about High-Yield Investing (click here) |
ARC Energy Trust (OTC: AETUF/TSX: AET-UN,) is the 14th-largest oil and gas producer on Canada's benchmark Toronto Stock Exchange and one of 25 companies that produce 90% of the oil and gas in western Canada. In 2007, production was estimated to be approximately 63,000 barrels of oil equivalent per day (boe/d). From its inception in 1996, ARC has provided investors with an annual return of +26.6%, including dividends and share price gains.
Since November 2005, ARC has paid out $0.20 Canadian per unit monthly, for a total of $2.40 per year. Currently, the U.S. and Canadian dollars are near parity. As such, U.S. investors can expect to receive a similar amount — which equates to a yield of 9.5%. The company has a history of steady dividend payouts. Prior to increasing its dividend in 2005, the company paid $0.15 per unit monthly for nearly three years.
ARC is headquartered in oil and gas-rich Alberta and 67% of its production comes from that Canadian province, with another 26% from Saskatchewan and Manitoba. The company is balanced in terms of oil and gas production, with light and medium oil comprising 51% and natural gas 43%. The balance of production is in natural gas liquids and heavy oil.
In 2007, the company's per share cash flow from operations declined from $3.59 to $3.35. However, ARC maintained its annual distribution at $2.40 per share, paying out a conservative 72% of its operating cash flow.
The company was hamstrung by weaker natural gas prices last year. For 2007, gas brought in an average of $6.75 per thousand cubic feet (Mcf) — versus $6.97 in 2006.
And although oil prices soared over the past year, the strong Canadian dollar offset some of the increase. As a result, the average price (before hedging) ARC received on its oil production during 2007 was only marginally better — $69.24 compared to $65.26 — than the year before.
Still, to keep production steady, ARC has an active roster of shallow gas plays it continues to develop, as well as light oil properties in Ante Creek, Pembina, and southeastern Saskatchewan. Roughly 66% of its reserves are proved and producing, with the balance considered the more speculative "probable."
Investors should be aware that a variety of tax changes could affect the stock. Most important is the Canadian government's legislation that will likely force most Canadian royalty trusts to convert to corporations by January 1, 2011. In fact, the company, which was one of the first to adopt the trust model, said it is leaning toward converting to a corporation, as "the conversion from a trust to a corporation may be the most logical and tax efficient alternative for ARC unitholders.''
In addition, the Alberta government hiked royalties on oil and gas production as of January 2009. Since ARC has nearly 70% of its production in Alberta, this royalty increase could increase the company's royalty taxes paid to the province.
In March 2007, the U.S. Congress also introduced legislation that would mean U.S. unitholders would no longer receive the 15% qualified dividend tax rate on Canadian income trusts they had in the past. This legislation is still pending.
Offsetting these bearish factors are planned changes to Canadian taxes that will bring corporate rates down from 22.1% to 15% between now and 2012.
Action To Take —-> ARC is suitable for investors who can tolerate volatile commodity prices, changing U.S./Canadian currency exchange rates, and an uncertain legislative environment in order to secure a near double-digit yield.
Good investing!
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About Carla Pasternak
Editor of StreetAuthority.com's High-Yield Investing newsletter since its inception in May 2004, Carla Pasternak draws on a variety of financial backgrounds to make profitable calls on income-generating stocks for her readers.
Carla has been employed in the investment industry for more than two decades. In addition to her work as a writer for several nationally recognized financial publishers, her previous experience includes a position as president of a well-respected investor relations firm. She has also been writing shareholder reports for public companies since 1980.
A highly successful investment analyst, Carla specializes in high-yield, income-paying stocks. In that pursuit, she's always mindful to select companies that not only pay rich dividends, but that also deliver strong long-term capital gains. Furthermore, Carla's experience in writing SEC filings gives her the added insight required for her to truly understand a company's current and future financial health.
On the educational front, Carla holds BA, MA, MBA and Ph.D. degrees. When she's not watching the market, she's teaching business courses at the college level and managing millions of dollars in portfolio assets.
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