Published:
April 7, 2008
ARC Energy Trust (OTC: AETUF/TSX: AET-UN, $25.20) 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!
Carla Pasternak
Editor
High-Yield
Investing
About High-Yield Investing
High-Yield Investing is
a monthly investment newsletter that brings you a wealth of information on the
market's leading income stocks and funds, as well as a host of relatively
unknown investment options that you probably won't find coverage of anywhere
else. Many
of these securities provide investors with annual dividend yields of 10%, 15%,
even 20% or more. The newsletter not only provides subscribers with
investing ideas that produce incredibly high dividend yields, but the kicker is
that these high-yield investments have also consistently outperformed the major
market averages. (Learn
More)
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.
To learn more about Carla Pasternak's premium income investing newsletter -- High-Yield
Investing -- please visit
this link.
|
