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 Reports and Commentary from the Investment World

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Enerplus Income Trust

Enerplus Income Trust (ERF:NYSE) 2003-12-29

Excellent income is available from Canadian Royalty Trusts.

A royalty trust is a type of corporation set up so that its profits are not taxed at the corporate level, to avoid double taxation. However, the dividends are taxed as personal income.

In its most basic form, a royalty trust is a simple revenue stream from some asset, such as gold from a gold mine, oil or gas or income from a patent. The royalty trust must distribute the bulk of its income. By Law the Royalty Trusts must distribute 90% of all their earnings to the shareholders.

Like all public companies, you can buy shares of these Royalty Trusts on the stock market. They trade just like any other stock.

As an investor, you will receive a nice annual income just for holding these trusts, whether the share price goes up or down.

The Enerplus Resources Fund is one of the best of these Royalty Trusts. It trades on the New York Stock Exchange (ERF:NYSE) and has been paying a dividend of around 10% every quarter for the past 18 years.
But, in addition to the income, this fund could return excellent Capital gains too.  The main reason for this is that it is involved in the oil & gas sector, which is just emerging as the hot sector.

The 90% of profits that are distributed comes in the form of a 9.8% dividend paid once a quarter.

Enerplus is an oil company set up as a Royalty Trust to avoid the double taxation problem. The big difference from other royalty trusts is that this one is actively acquiring more production.
In the last year the group acquired PCC Energy Inc, PCC Energy Corp, Enerplus Global Energy Management Company and Ice Energy Ltd. This means that the Trust will have a longer life span than most of its peers.
Enerplus has been in existence and paying dividends since the 1980’s, so the business model is proven and strong.
Enerplus’s resources are located in Alberta, Saskatchewan, North Dakota, and Montana. This is good news, because they are well away from the troubles of the Middle East.  In addition, they are geographically located next to their largest consumer, the U.S.A, so the supply can flow quickly and easily.

The Western Canadian provinces of Alberta, Saskatchewan, and Manitoba are rich in hydrocarbons. There are traditional oil deposits of both light and medium crude, natural gas, deep natural gas, coal bed methane, and the Athabasca tar sands. Enerplus has assets in all of these groups, which allows them to take advantage of robust oil and gas prices.

Enerplus has been very successful to date, however, rather than rest on their laurels, Enerplus are actively seeking new resources. They have drilled between 200 and 367 wells every year since 2000, with success rates above 97% every year. Reinvestment in development has been impressive too.
Enerplus is a well regarded company, and has a long track record. It is a well run company that is well leveraged to the price of oil and gas.
This company meets all the criteria for a good conservative oil investment:

1) It is cashing in on the current strong oil & gas prices.

2) It has current production of 79,000 BOE per day, of which 56% is natural gas. This is very attractive because it is the source of its high dividend.

3) Being based in Canada, it is not vulnerable to production disruption from political and environmental problems.

4) Enerplus has been in the oil and gas business for the last 18 years. The management has seen oil booms and busts, so they have experience in building and maintaining their asset base for the long run. They have several hundred thousand acres of unexploited oil leases and have over 400 million barrels of proven reserves.

5) Currently, the climate is excellent for investment in an oil trust for several reasons: Energy prices are moving higher, which leads to high yields. Interest rates have a long way to go before their yields approach those of oil trusts. Enerplus’ inventory is a split between oil and gas, so you benefit from high gas prices as well as oil prices.

There are some downside risks too.
Oil prices could plummet, which would take Enerplus with it, but the risk is no where near as great as for an exploration company. Most analysts are still bullish about long-term oil prices and we would be surprised if the price of oil falls in the near future.

The cost of replacing reserves could continue to rise. It is getting expensive to replace reserves; however, as oil prices increase, the cost of replacing used reserves increases as well.

Enerplus has in excess of 200,000 undeveloped acres and is actively acquiring reserves now.

Buy Enerplus Royalty Trust (ERF:NYSE) up to US$ 40 for a secure 10% dividend and an excellent chance of additional capital appreciation.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.