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TMFDeej (99.47)

Someone finally realized how undervalued CANROYs are

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October 22, 2009 – Comments (5) | RELATED TICKERS: HTE , PWE , PGH

I have been squawking for what seems like years about how undervalued Canadian Royalty Trusts aka CANROYs are.  These companies have been awarded disappointing multiples by Mr. Market for ever since the Canadian's government's shabby treatment of them and investors during the "Halloween Massacre" when it pulled the rug out from under them.

Of course, wouldn't you know it the first time that an oil company realizes how cheap the companies in this sector are they buy out the only one that I'm not long in CAPS, Harvest (HTE).  This morning the state-run Korea National Oil Corp. (KNOC) announced that it purchasing Harvest for $1.8 billion Canadian Dollars plus the assumption of $2.3 billion Canadian in debt (I would provide a conversion of the traditionally less valuable Canadian Dollar to U.S. Dollars, but shockingly they are rapidly approaching parody). 

To me, Harvest's refining assets make it the worst-of-breed of all of the CANROYs.  If HTE can be taken out at a 47% premium to its weighted average price over the past 30 days, I can't imagine how much more a CANROY with better assets like Penn West (PWE) is actually worth.  Perhaps this deal will help Mr. Market realize just how undervalued these stocks are right now, even with the pending conversion to a normal corporation.

KNOC claims that it is in talks to purchase three to four more oil firms and that it could reach an agreement to buy another overseas oil firm by the end of this year.  I wonder if they are talking with another CANROY.  Part of me doubts it, the Canadians would probably blow a gasket and put the kibosh on the deal if an Asian national oil company tried to acquire too many of its assets.  Well, they brought this whole problem of undervalued assets on themselves by screwing with these companies and making the market wary of them.  Maybe they should have their state retirement fund purchase huge stakes in CANROYs.  At least then they would be able to take advantage of the low prices themselves and at the same time retain control of their resources.

Korea's KNOC to Buy Harvest Energy

Deej

Long PWE

5 Comments – Post Your Own

#1) On October 22, 2009 at 1:31 PM, TMFDeej (99.47) wrote:

HA, I just realized that I made a Freudian slip and wrote but shockingly they are rapidly approaching "parody" not "parity."

This whole journalism thing is a breeze.  I can crank out good stories faster than any of the newswires.  I just came across this one that is almost identical to the post that I wrote earlier:

International Buyout Fever Hits Energy Trusts

Now if I could only find someone who was willing to pay me to write, then I'd be onto something ;).

Deej

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#2) On October 22, 2009 at 2:09 PM, TMFDeej (99.47) wrote:

Here's a list of CANROYs for anyone who's interested:

HTE - the aforementioned company that is being bought out.

PWE - The largest CANROY and my personal favorite.

ENT - A trainwreck of a company, the smallest but also the most likely to rally in this new trash stocks are kind world.

PGH - Another fairly big company, that at one time grew too quickly for its own good.

PDS - This one doesn't count because it's a driller, not an E&P company that someone would be looking fo acquire.

BTE - More heavily into nat gas than oil, if I recall correctly.

PVX

AAV

ERF

These are just the U.S.-listed coompanies that come to mind. There's a ton more out there that are listed only on the Canadian exchanges.

Deej

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#3) On October 22, 2009 at 3:44 PM, dpid (85.92) wrote:

What do you think is a fair multiple for PWE?  I see its trading around 5 something for the P/E while US based Oil Trusts (e.g. hgt, pbt, sbr) trade in the 9s now (after rally recently). 

Going next year, PWE and others will mostly cut their dividends substantially as they will try to retain capital to make purchases... or do you think most of the CANROYs will be purchased?

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#4) On October 22, 2009 at 3:48 PM, darroj (55.47) wrote:

Nice post. The sale gave a nice boost to the whole sector... I'm long PWE, ERF.

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#5) On October 26, 2009 at 4:14 AM, djkumquat (52.67) wrote:

http://seekingalpha.com/article/167456-canadian-royalty-trusts-will-dividends-rise-or-fall

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