At current production rates, Peyto has proven oil and natural-gas reserves that should last 14 years.

Peyto’s cash flow was $0.47 a unit in the three months ended September 30, 2010, up 20.5% from $0.39 a year earlier. The units trade at 9.1 times the trust’s annualized cash flow, based on the latest quarter. The trust’s long-term debt of $455 million is a reasonable 21.7% of its $2.1-billion market cap.

Right now, Peyto pays a monthly distribution of $0.12, for an 8.4% yield. The trust paid out a relatively low 77% of its cash flow as distributions in the latest quarter. However, it plans to cut its monthly payout to $0.06 when it converts to a conventional corporation on December 31, 2010, just before Ottawa’s new income-trust tax takes effect.

That lower payout will let Peyto put more of its cash flow toward boosting production. Its 2011 capital spending is expected to range between $250 and $275 million. Peyto aims to increase its production to between 33,000 and 37,000 barrels per day by the end of 2011.

Peyto Energy Trust is a buy.

BONAVISTA ENERGY TRUST $28 (Toronto symbol BNP.UN; Units outstanding: 133.6 million; Market cap: $3.7 billion; TSINetwork Rating: Extra Risk; Divd. yield: 6.9%; www.bonavistaenergy.com) produces and explores for oil and natural gas in Alberta, Saskatchewan and B.C. It produces an average of 68,029 barrels of oil equivalent per day (including gas), weighted 61% to gas and 39% to oil.

At current production rates, Bonavista has proven oil and gas reserves that should last for 12 years.

Bonavista’s cash flow was $0.79 a unit in the three months ended September 30, 2010, down 1.3% from $0.80 a year earlier. The units trade at 8.9 times the trust’s annualized cash flow, based on the latest quarter. Bonavista’s long-term debt of $974.1 million is a reasonable 26.3% of its $3.7-billion market cap.

Earlier this year, Bonavista bought oil and gas properties in west-central Alberta from Suncor for $230.4 million. The new properties have raised Bonavista’s combined oil and gas production by 6%, and are providing a number of new drilling targets.

The units yield 6.9%. Bonavista paid out just 52% of its cash flow as distributions in the latest quarter. That will help it maintain its distributions after it converts to a conventional corporation by the end of this year. It also leaves lots of cash flow to raise exploration spending. Bonavista plans to spend as much as $390 million on exploration in 2011 to raise production to 71,000 barrels per day or more.

Bonavista Energy Trust is a buy.

Oakmont produces about 280 barrels of oil equivalent per day (this measurement includes natural gas). This will only increase Zargon’s daily output by about 2.8%, bringing it to roughly 10,330 barrels per day. However, Oakmont holds about $7.6 million of unused tax losses that Zargon can use to offset its earnings when the federal government’s tax on income trusts comes into effect on January 1, 2011. Along with its producing properties, Oakmont also brings significant oil-development potential.

Zargon is still a buy.

However, as we note in a just-published issue of The Successful Investor, one royalty trust has an enviable advantage when it comes to dealing with the new tax.

This royalty trust’s tax losses will help maintain its high yield through 2011 and beyond

Oil and natural-gas producer Pengrowth Energy Trust (symbol PGF.UN on Toronto) will convert to a corporation before Ottawa starts taxing income trusts at the start of 2011. However, the royalty trust has $2.7 billion of tax losses on its books. It can use these to offset the new tax for several years.

That, along with its steady production, should help Pengrowth maintain its current annual payout of $0.84 a unit, for a yield of 7.6%.

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2011 advantage only one of this royalty trust’s strengths

Pengrowth is one of North America’s largest energy royalty trusts. Its main properties are in Alberta, B.C. and Saskatchewan. The trust also holds interests in other energy projects, including an 8.4% stake in the Sable Offshore Energy Project, which operates three offshore-drilling platforms south of Nova Scotia.

Roughly 60% of Pengrowth’s production is natural gas. The remaining 40% is oil. Pengrowth prefers to focus on proven properties with large reserves and predictable production rates. The trust has interests in six of western Canada’s top nine oil-producing areas. At current production rates, Pengrowth’s reserves should last 10.6 years.

New gas field boosts this royalty trust’s long-term potential

Pengrowth continues to expand through acquisitions. In September 2010, it bought the 82% of Monterey Exploration Ltd. that it did not already own for $366 million of units, which it issued to Monterey investors.

Monterey produces oil and natural gas at properties in Alberta and B.C. Pengrowth plans to spend $65 million to develop Monterey’s promising Groundbirch unconventional gas field in northeastern B.C. Unconventional fields cost more to develop than regular deposits, but can last decades longer. The trust will spend a total of $350 million on exploration in 2010.

Pengrowth’s units trade at a high 32.4 times its likely 2010 earnings of $0.34 a unit. However, they trade at a much more reasonable 5.1 times its forecast cash flow of $2.17 a unit.

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Roughly 60% of Pengrowth’s production is natural gas. The remaining 40% is oil. Investors see this a negative in light of today’s low gas prices. However, a colder-than-normal winter could cause gas prices to shoot up again. Pengrowth’s focus on proven properties with large reserves and predictable production rates also tempers its risk.

New properties spurred revenue jump

Pengrowth’s revenue rose 83.2%, from $955.3 million in 2005 to $1.8 billion in 2008. The jump was largely due to acquisitions, including the $1 billion of properties Pengrowth bought from U.S.-based oil company ConocoPhillips in January 2007. However, lower oil and gas prices caused the trust’s 2009 revenue to fall 44.2%, to $977.4 million.

Despite the higher revenue, earnings fell 28.4%, from $2.08 a unit (or $362.3 million) in 2005 to $1.49 a unit (or $262.3 million) in 2006. Thanks to the ConocoPhillips properties, earnings rose 50.9%, to $395.9 million in 2008. Pengrowth typically issues new units to pay for acquisitions. As a result of more outstanding units, its earnings per unit rose 6.0%, to $1.58 in 2008. In 2009, earnings fell 79.8% to $0.32 a unit (or $84.9 million).

Cash flow per unit fell from $3.93 in 2005 to $3.15 in 2006, but jumped to $3.65 in 2008. In 2009, cash flow fell 42.7%, to $2.09 a unit.

Gas field offers long-term potential

Pengrowth continues to expand through acquisitions. In September 2010, it bought the 82% of Monterey Exploration Ltd. that it did not already own for $366 million of units, which it issued to Monterey investors. Monterey produces oil and natural gas at properties in Alberta and B.C.

Pengrowth plans to spend $65 million to develop Monterey’s promising Groundbirch unconventional gas field in northeastern B.C. Unconventional fields cost more to develop than regular deposits, but can last decades longer. The trust will spend a total of $350 million on exploration in 2010.

Pengrowth’s units trade at a high 32.4 times its depressed 2010 earnings estimate of $0.34 a unit. However, they trade at a much more reasonable 5.1 times its forecast cash flow of $2.17 a unit.

Distribution safe for now

The trust will convert to a corporation before Ottawa starts taxing income trusts at the start of 2011. Pengrowth has $2.7 billion in tax pools it can use to offset the new taxes. As a result, it plans to maintain its current annual payout of $0.84 a unit, for a yield of 7.6%, for several years.

Pengrowth is a buy.

The trust’s $670.9-million debt remains low, at 11.8% of its market cap. The units trade at 8.4 times ARC’s forecast 2010 cash flow of $2.45 per unit. ARC currently yields 5.8%.

ARC Energy Trust is still a buy.

In the three months ended June 30, 2010, cash flow per unit fell 41%, to $0.62 from $1.05. That’s because wet weather lowered Penn West’s oil and gas production.

Penn West recently formed a 50/50 joint venture with Japan’s Mitsubishi Corp. to develop Penn West’s shale-gas properties in B.C.’s Cordova Embayment area. The joint venture will also develop some of Penn West’s conventional-gas properties in the Wildboy area of northeastern B.C. Mitsubishi will spend $850 million to earn its 50% interest.

The trust pays a $0.15 monthly distribution, for an annualized yield of 9.2%. Penn West plans to convert to a conventional corporation before the end of 2011. That’s because Ottawa will start taxing income trusts on January 1, 2011.

Penn West has over $6.9 billion in tax losses that it can use to delay paying taxes until well past 2011. As well, its payout ratio will likely average 50% next year. That should let it keep its distribution steady. However, the trust may cut its distribution if it feels channelling cash flow into its growing number of drilling prospects (including the Mitsubishi joint venture) will produce better results for unitholders.

The trust’s $2.7 billion of long-term debt is a reasonable 30.3% of its market cap. Penn West trades at 7.2 times its forecast 2010 cash flow of $2.72 per unit.

Penn West is still a buy.

ENERPLUS RESOURCES FUND $24.56 (Toronto symbol ERF.UN; Units outstanding: 176.0 million; Market cap: $4.3 billion; SI Rating: Extra Risk; Dividend yield: 8.8%) produces an average of 84,909 barrels of oil equivalent per day (weighted 42% to oil and 58% to natural gas).

In the three months ended June 30, 2010, cash flow per unit fell 27.5%, to $0.92 from $1.27, due to lower selling prices for oil and gas.

Enerplus has increased its planned exploration and development spending for 2010 by 14.1%, to $485 million from $425 million, to take advantage of drilling opportunities on newly acquired properties.

Enerplus’ units yield 8.8%. The fund plans to convert to a dividend-paying corporation in January 2011. However, it pays out only around 55% of its cash flow as distributions. As well, it has over $2.5 billion in tax losses. These strengths should let the trust meet its goal of continuing to pay dividends at the current rate.

The fund’s $698.4 million of long-term debt is a low 16.2% of its market cap. Enerplus’ 2010 cash flow is forecast at $3.90 a share. It trades at 6.3 times that estimate.

Enerplus Resources Fund is a buy.

At current production rates, Peyto has proven oil and natural-gas reserves that should last 14 years.

Peyto’s cash flow was $0.51 a unit in the three months ended March 31, 2010. The units trade at 7.6 times the trust’s annualized cash flow, based on the latest quarter.

The trust’s long-term debt of $450 million is a reasonable 24% of its $1.9-billion market cap.

In light of its strong cash flow and exploration success, Peyto is increasing its 2010 exploration spending to $225 million to $250 million. That’s up from $72.7 million in 2009.

The units yield 9.3%. Peyto paid out a relatively low 71% of its cash flow as distributions in the latest quarter. That will help it keep its distributions high when it converts to a conventional corporation on December 31, 2010, just before Ottawa’s new income-trust tax takes effect. As well, rising natural-gas prices would boost the trust’s cash flow and lower that payout ratio.

Peyto Energy Trust is a buy.

BONAVISTA ENERGY TRUST $23.43 (Toronto symbol BNP.UN; Units outstanding: 133.4 million; Market cap: $3.1 billion; SI Rating: Extra Risk; Dividend yield: 8.2%) produces and explores for oil and natural gas in Alberta, Saskatchewan and British Columbia. It produces an average of 65,885 barrels of oil equivalent per day (including natural gas), weighted 60% to natural gas and 40% to oil.

At current production rates, Bonavista has proven oil and natural-gas reserves that should last for 11.7 years.

Bonavista’s cash flow was $0.85 a unit in the three months ended June 30, 2010. The units trade at 6.9 times the trust’s annualized cash flow, based on the latest quarter. Bonavista’s long-term debt of $945.7 million is a reasonable 30.5% of its $3.1-billion market cap.

Bonavista recently bought oil and gas properties in west-central Alberta from Suncor for $230.4 million. The new properties will raise Bonavista’s combined oil and gas production by 6%, and provide a number of new drilling targets.

The units yield 8.2%. Bonavista paid out just 49% of its cash flow as distributions in the latest quarter. That will help it maintain its distributions after it converts to a conventional corporation by the end of 2010. It also leaves it lots of cash flow to keep raising its exploration spending. Bonavista is spending as much as $350 million on exploration in 2010. That’s up 72.4% from $204 million in 2009.

Bonavista Energy Trust is a buy.

In the three months ended March 31, 2010, ARC’s revenue rose 39.5%, to $314.1 million from $225.2 million a year earlier. Cash flow per unit rose 16.7%, to $0.63 from $0.54. Increased production and higher oil and gas prices pushed up results.

ARC currently yields 6.0%. The trust plans to convert to a conventional corporation on January 1, 2011. However, it has over $2.2 billion in tax losses it can use to delay paying corporate taxes. As well, it will probably pay out only 45% of its cash flow as distributions this year. That low payout ratio will help it maintain its current high yield.

The trust’s debt remains low, at 11.9% of its market cap. The units trade at 7.5 times ARC’s forecast 2010 cash flow of $2.65 per unit.

ARC has agreed to buy Storm Energy (Toronto symbol SEO) for $680 million in ARC units. Storm operates the Parkland Montney field in the Peace River Arch area of west-central Alberta, near ARC’s Dawson field. The purchase will raise ARC’s units outstanding by 11.4%. However, adding Storm Energy will increase ARC’s output by 14.7%.

ARC Energy Trust is still a buy.

PENGROWTH ENERGY TRUST $9.99 (Toronto symbol PGF.UN; Units outstanding: 291.1 million; Market cap: $2.9 billion; SI Rating: Average; Dividend yield: 8.4%) produces oil and natural gas in western Canada and off the Nova Scotia coast. Production is weighted 51% to oil and 49% to gas.

In the three months ended March 31, 2010, revenue rose 27.1%, to $350.7 million from $275.9 million. Cash flow per unit rose 37.8%, to $0.51 from $0.37. Higher oil prices pushed up results.

Pengrowth now yields 8.6%. The trust plans to convert to a corporation before the end of 2010. However, its distributions account for just 44% of its cash flow, so they seem secure. As well, Pengrowth has $2.8 billion in tax losses that it can use to delay taxation under Ottawa’s new trust tax until 2013.

The trust’s $1 billion of debt is a reasonable 34.5% of its market cap. The units trade at 5.1 times estimated 2010 cash flow of $1.95 per unit.

Pengrowth plans to spend $285 million on exploration and development this year. That’s up 29.5% from $220 million in 2009. The trust will put some of these funds toward developing properties in western Canada that have lots of longer-term potential. These include its Lindbergh oil-sands project, where it aims to begin producing oil in 2016. Pengrowth also plans to develop its properties in the Horn River shale-gas field in northeastern B.C.

Pengrowth Energy Trust is still a buy.

In the three months ended March 31, 2010, Pengrowth’s daily production fell 5.8%, to 6,806 barrels of oil equivalent (which includes natural gas) from 7,226 barrels a year earlier. However, its selling price per barrel rose 17.8%, to $52.49 from $44.57.

As a result, Pengrowth earned $0.37 a unit in the latest quarter. That’s a big improvement over the $0.21 a unit it lost a year earlier. Cash flow per unit rose 37.8%, to $0.51 from $0.37.

Pengrowth is a buy.

At current production rates, Peyto has proven oil and natural-gas reserves that should last 14 years.

Peyto’s cash flow was $0.46 a unit in the three months ended December 31, 2009. The units trade at 7.3 times the trust’s annualized cash flow, based on the latest quarter.

Peyto’s long-term debt of $435 million is a reasonable 29% of its $1.6-billion market cap. The trust just raised $74.9 million by issuing new units. It will use these funds to expand its 2010 exploration program to $175 million to $200 million, up from $72.7 million in 2009.

The units yield 10.9%. Peyto paid out a relatively low 78% of its cash flow as distributions in the latest quarter. That will help it keep its distributions high when Ottawa’s new income-trust tax takes effect in 2011. As well, rising natural-gas prices would boost the trust’s cash flow and lower that payout ratio.

Peyto Energy Trust is a buy.

BONAVISTA ENERGY TRUST $24.32 (Toronto symbol BNP.UN; Units outstanding: 132.8 million; Market cap: $3.2 billion; SI Rating: Extra Risk; Dividend yield: 7.9%) produces and explores for oil and gas in Alberta, Saskatchewan and British Columbia. It produces an average of 61,834 barrels of oil equivalent per day (weighted 60% to natural gas and 40% to oil).

At current production rates, Bonavista has proven oil and natural-gas reserves that should last for 8.6 years.

Bonavista’s cash flow was $0.93 a unit in the three months ended December 31, 2009. The units trade at 6.2 times the trust’s annualized cash flow, based on the latest quarter. Bonavista’s long-term debt of $832.1 million is a reasonable 28.7% of its $3.2-billion market cap.

Bonavista recently announced plans to buy oil and gas properties in west-central Alberta from Suncor for $228 million. To help pay for this purchase, the trust recently raised $177 million by issuing new units. The new properties will raise Bonavista’s combined oil and gas production by 6%, and provide a number of new drilling targets.

The units yield 7.9%. Bonavista paid out just 44% of its cash flow as distributions in the latest quarter. That puts it in a good position to maintain its distributions when Ottawa’s new income-trust tax takes effect in 2011.

Bonavista Energy Trust is a buy.