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The deflationary credit contraction has significantly strengthened over the past year and most
analysts are beginning to accept the condition. Holders of capital are
seeking safety and liquidity for their capital. Many have been selling
most of their assets. Particularly oversold appears to be the Canadian
royalty trusts particularly in the oil and gas sector.
The
implications of Peak Oil Theory are staggering.
Oil is extremely important for the United States economy and the
need to access cheap and reliable imported oil is even more vital.
Foreign dependence makes domestic consumption of about 21 million
bbl/day compared to about 7.5 million bbl/day particularly disturbing.
Due to fixed costs in infrastructure these ratios are unlikely to
decline. There are many ways to play the oil and natural gas sector
ranging from the oil majors like (XOM, COP, CVX, BP, TOT, etc.) to refineries
like (TSO, VLO, etc.) to VLCCs like (FRO) and canadian oil and natural gas
royalty trusts like (HTE, PVX, PGH, ERF, etc.)
Gold
is a currency. Commodities are produced because they add value to
society. Oil is the lifeblood of the modern worldwide economy and is
integral in all aspects from food to aerospace. The value gold adds to
society is in performing mental value calculations.
The historic gold to oil ratio is incredibly consistent.
Currently oil appears to be extremely cheap when priced in gold.
Additionally, almost everyone agrees the Federal Reserve Note rally is
fundamentally unsound as it is tremendously encumbered.
As the
deflationary vortex has strengthened the price of Canadian oil and gas
royalty trusts have plummeted. For example, over the past year HTE
has fallen from about US$20 to US$8 or the price of a silver coin.
It appears that market may be pricing in systemic collapse
complete with breakdowns in food distribution accompanied with
riots. Assuming that is not the case the current prices have resulted
in many outstanding bargains in my opinion.
Harvest
Energy Trust (HTE) was founded in 2002 and headquartered in
Calgary, Canada. Harvest engages in exploration, development
and maintenance of petroleum and natural gas properties along
with a gasoline refinery. Harvest currently has 154.5 million shares
outstanding as of December 31, 2007 it had a net total proved plus probable
reserves of approximately 192,297 million barrels of oil equivalent.
Harvest pays a monthly distribution of C$.30 and has a payout ratio of
66% of cash flows. This is extremely low for them historically.
To some extent the cash flows are protected and hedged through an
extensive program with the intent to provide stability to the monthly
distribution.
The
North Atlantic refinery appears to have been an albatross around the income
statement. The Canadian dollar has significantly weakened against the
Federal Reserve Note Dollar. Oil and natural gas prices have
significantly fallen over the last several months. Proposed Canadian
tax laws have been clarified and enacted. Harvest is extremely well
positioned with over $3B in ‘tax pools’ to draw upon to shield
income.
The
Canadian oil and natural gas royalty trusts were originally designed and
intended as retirement vehicles. The goal of Harvest management is to
create long-term shareholder value. Harvest currently has more than one
barrel of oil per share with a payout ratio significantly below 100%.
Oil is and will remain a large component of the worldwide
economy. The oil price appears extremely cheap when priced in gold.
The Federal Reserve Note Dollar’s fundamentals are abysmal and
according to GATA’s contentions it is extremely overvalued relative to
gold. Therefore, it appears that the discounted future cash flows from
Harvest when priced in gold are beginning to look like an attractive place to
allocate capital for a few years. For example, should the Federal
Reserve Note Dollar collapse then tangible assets are owned so one’s
capital is preserved.
These
are some key
ratios for determining value calculation.
Worst case scenario oil prices continue to fall and the Federal Note Dollar
continues to strengthen which will weaken Harvest’s extremely
attractive yield from the current approximately 30% (depends on your tax
situation). Long term put options can easily be purchased to preserve
capital investment. The cash flow makes it more stable than the VLCCs and
refineries and the North American production makes it safer than the oil
majors.
For
these reasons Harvest appears to be fairly cheap and a good opportunity.
Disclosure:
Long physical gold and long HTE. No other positions in
corporations mentioned.
Trace Mayer
RuntoGold.com
Trace Mayer,
J.D., holds a degree in Accounting from Brigham Young University, a law
degree from California Western School of Law and studies the Austrian school
of economics. He works as an entrepreneur, investor, journalist and monetary
scientist. He is a strong advocate of the freedom of speech, a member of the
Society of Professional Journalists and the San Diego County Bar Association.
He has appeared on ABC, NBC, BNN, many radio shows and presented at many
investment conferences throughout the world.
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