Three stable oil and gas trusts to buy now

These three royalty trusts have seen their revenue and cash flow fall because of lower oil and natural-gas prices. Nevertheless, with their reasonable debt and low payout ratios, all three are well positioned to withstand these lower prices — and to prosper when oil and gas rise again.

ARC ENERGY TRUST $17.53 (Toronto symbol AET.UN; Units outstanding: 234 million; Market cap: $4.1 billion; SI Rating: Speculative) produces oil and gas in western Canada. ARC’s average daily production of 64,325 barrels of oil equivalent (this measurement includes natural gas) is weighted 50% to oil and 50% to natural gas.

ARC’s revenue fell 44.8% in the three months ended March 31, 2009, to $225.2 million from $407.9 million. Cash flow per unit fell 44.9%, to $0.54 from $0.98. Lower oil and natural-gas prices were the main reason for the declines.

The trust’s debt remains low, at 17% of its market cap. ARC has just lowered its monthly distribution by 16.7%, to $0.10 from $0.12. The units now yield 6.9%. ARC flowed only 70% of its cash flow through to its unitholders as distributions in the latest quarter. The units trade at 8.2 times ARC’s estimated 2009 cash flow of $2.15 per unit.

ARC Energy Trust is still a buy.

PENGROWTH ENERGY TRUST $9.33 (Toronto symbol PGF.UN; Units outstanding: 257.8 million; Market cap: $2.4 billion; SI Rating: Average) produces oil and gas in western Canada and off the Nova Scotia coast. Its average daily production of 80,284 barrels of oil equivalent is weighted 51% to oil and 49% to natural gas.

Pengrowth’s revenue fell 29.4% in the three months ended March 31, 2009, to $323 million from $457.6 million. Cash flow per unit fell 57.5%, to $0.37 from $0.87. Low oil and gas prices also prompted Pengrowth to cut production.

Pengrowth’s $1.7-billion long-term debt is a somewhat high 71% of its market cap. But it’s just over three years’ cash flow. The trust distributed 82% of its cash flow as distributions in the latest quarter, but it should average about 62% this year. The units trade at 4.2 times Pengrowth’s estimated 2009 cash flow of $2.20 per unit. The trust yields 12.9%.

Pengrowth is still a buy.

PENN WEST ENERGY TRUST $14.88 (Toronto symbol PWT.UN; Units outstanding: 414.2 million; Market cap: $6.2 billion; SI Rating: Speculative) is the largest oil and gas trust in North America.

In the first three months of 2009, lower oil and gas prices pushed down Penn West’s revenue by 47.7%, to $625 million from $1.2 billion. Cash flow per unit fell 50.6%, to $0.87 from $1.76. The trust’s $4.1-billion long-term debt is 66% of its market cap, but just 3.1 times its annual cash flow.

Penn West has average daily production of 180,096 barrels of oil equivalent (weighted 41% to natural gas and 59% to oil). The units yield 11.8%. Penn West pays out around 60% of its cash flow as distributions. It trades at 4.1 times its estimated 2009 cash flow of $3.60 per unit.

Penn West is still a buy.

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