Metalnewsnet 4 May ： Despite looming tax changes there are reasons to like this Canadian Trust. Here's why its best days are still to come.The first column that I wrote for The Income Investor five years ago recommended buying units of Canadian Oil Sands Trust. At the time, I commented that although it didn't have the highest yield in the energy sector, the trust had the potential to increase its payout over time. That would lead to an increase in cash flow as well as an upward move in the share price as other investors were attracted to the increasing profits and distributions generated by the company. I am pleased to say that, in this case at least, the theory proved correct. I recommended COSWF at $16.85 in March 2005. At the time the units paid a quarterly distribution of 10c, or 40c per unit annualized. Although there have been ups and downs along the way, the current distribution has more than tripled to 35c a unit, while the share price has almost doubled to $30.35 (price as of April 30). This compares favorably with both the broader stock market, where the S&P/TSX Composite Index has risen by less than 35% since March 2005, and with the Energy Trust Index, which has actually fallen over the same period. Of course, there has been volatility along the way. Less than two years ago, with oil nudging U.S.$148 per barrel, Canadian Oil Sands was trading over $50 and distributing $1.25 per quarter. Nonetheless, it has proved to be a very rewarding investment for those who stayed the course. Let's examine some the reasons why this proved to be the case and what the outlook is for the next five years. Why we liked it: The reason that the managers at Guardian Capital's income funds have owned Canadian Oil Sands for the last dozen years is very simple. As long as the price of oil remained above $25 per barrel, the trust, as the owner of the largest stake (36.74%) in the Syncrude oil sands consortium, would be profitable. It was the original oil sands development with its infrastructure already in place and did not face the same cost pressures as the new projects that were being built to take advantage of the higher oil prices in the past decade. The other reason for liking the trust was that it was expanding production. The Stage 3 expansion increased Syncrude's output (and Canadian Oil Sands' share) by one-third to 350,000 barrels a day. Thus, even if the price of oil did not increase, Canadian Oil Sands' revenues and profits would rise. Once the capital expenditure on the expansion was finished, the trust would have more cash available to distribute to its investors. Furthermore, to reduce the risk of its expensive Stage 3 expansion, Canadian Oil Sands had hedged the oil price it received by selling its production in the forward market. The trust also hedged its U.S. currency exposure to ensure that it received enough cash to pay for the expansion, whatever happened to the oil price and currencies. As the oil price and the Canadian dollar were both appreciating while Stage 3 was being built, the trust surrendered potential profits for a guarantee that it would have enough cash. Once the expansion was completed, although (as with virtually every other oil sands project) it was both late and over budget, these hedges were allowed to expire. (from Forbes) |
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