04 January 2007

Canetic Resources Trust (CNE)

Okay, so the CNE logo is not as eye-catching a graphic as Salma, but until Playboy runs a spread on the women of the oil patch, this'll have to do.

Canetic is one of many income trusts that Canadians, especially retirees, invest in for the large monthly dividends. Nice thing is, this one trades on the NYSE as well, unlike COS.UN, the income trust I examined back in 2005.

Canetic, along with all other Canadian trusts plummeted in October after the Tory finance minister, Jim Flaherty, shocked Canuck investors by sunsetting existing trusts' tax benefits in 2011.

Cramer noticed. The Canadian Press noticed:

After roiling financial markets and riling investors, the federal government's decision to tax income trusts has been named 2006 business story of the year by CP and Broadcast News.

Cramer took a look at CNE (as well as another interesting trust, Enterra) back on November 15:

In response to all the email he gets regarding Canadian energy trusts, Cramer told viewers these stocks are worth owning now.

In fact, he said he would rent a U-Haul and back up the truck. Cramer believes two Canadian energy trusts, Canetic Resources Trust ( CNE - news - Cramer's Take) and Enterra Energy Trust (ENT - news - Cramer's Take - Rating), are done going down and ready to bounce.

Even if these stocks don't move one bit, they are worth owning because they are "dividend-ilicious," he said, adding that Canetic offers a dividend of 19%, while Enterra has a 20% yield.
There is also a chance the government might change its mind and retract the law, an event that could cause both Canetic and Enterra shares to jump, Cramer said.

I agree that the monthly dividend is the real draw of Canetic. Cramer was a bit premature with his assertion that these trusts were "done going down." They both popped in the days following this Mad Money broadcast (CNE went from just over $13 to $15 a share; ENT went from $7.48 to $10.) and have since recovered from the Cramer effect.

Actually, today was a pretty rough day for oil stocks as CNE closed today at $13.25, down 4.6%.

Before I leave Cramer alone, he is also wrong (wha? Cramer wrong?) about the Canadian government changing the law. First, the Conservatives are in charge, and they pulled this unfriendly-to-investors manoeuver. The Liberals certainly won't turn away higher government revenues. Second, the Tories rightfully feared that huge traditional corporations like telecommunications giant BCE and natural gas producer EnCana would become income trusts to lessen their tax burden.

I've picked on Cramer enough. Now let's look at Kish Patel from Morningstar's reasoning behind giving CNE one miserable star:

We are reducing our fair value estimate for Canetic to $10 per unit from $11. We have reduced our production estimate for 2007 to approximately 78,000 boe/d. Since we had originally factored in some uncertainty around the Starpoint merger by utilizing an elevated cost of equity, we think it's appropriate at this time to lower Canetic's cost of equity now that some of that uncertainty has been reduced.

Our fair value estimate is based on benchmark oil price forecasts of $66 per barrel in 2006, $54 in 2007, $46 in 2008, $44 in 2009, and $46 in 2010, and natural-gas price forecasts of $6.70 per thousand cubic feet in 2006, $6.10 in 2007, $6.10 in 2008, $6.20 in 2009, and $6.50 in 2010. A 10% increase in these forecasts would result in a fair value estimate of $14 per share, and a 10% decrease in these forecasts would result in a fair value estimate of $5.50.

My beef with Morningstar's low fair value estimate comes from their 2007 oil price forecast. The Energy Information Administration of the Department of Energy recently projected crude oil to average $65 per barrel in 2007.

Morningstar used $54 in their valuation model.

But they were nice enough to show how a 10% change in the price of oil either way would change the estimate.

We're not talking about a 10% change. $65 per barrel is a bit more than 20% higher than $54 per barrel. So if a 10% increase raises the fair value of CNE from $10 a share to $14, shouldn't a 20% increase bump up CNE's fair value to around $18?

Patel is also worried about the power of the Loonie:

The trust could also be hurt by continued strength in the Canadian dollar, as it would receive less for each U.S. dollar-denominated barrel of oil it sells.

The Canadian dollar has softened to $0.85 from almost $0.91 earlier this year, alleviating some of Patel's concern.

So there are some significant risks that come with these attractive yields. Dividend-yielding stocks are usually dull, low-volatility affairs.

I should consider my options.

Theoretically, if I were to purchase say 1000 shares of CNE tomorrow, I would consider picking up ten August 07 put options with a $12.50 strike as a hedge. Each option last sold for $1.05 today. These puts would give me ample insurance against a collapse of CNE shares.

CNE is headed for the Watch List. In order to keep tabs on the stock and information that can affect its price, here are several links of note:

Here is where you can get the Canetic Trust investor fact sheet.

Here is a site to keep up on oil price forecasts.

Here are current oil prices.

Google Finance will help keep tabs on CNE's price and its competition.

Here is AccuWeather's 15-day forecast for a particular Northeast locale that can help you keep up with whether the winter weather is abnormally warm or cool, thus affecting the price of oil (and CNE)

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