The price of oil has fallen sharply in recent months, but here at MoneyWeek, we continue to believe oil is in a long-term bull market.
Spare capacity has halved over the last 20 years and, with energy-hungry countries such as China squeezing supply, “oil markets remain extremely tight”, Barclay’s Kevin Norrish tells The Daily Telegraph. So the latest fall could be a good buying opportunity – but how can investors take advantage?
The most obvious way is through companies or funds that derive their income from exploiting oil and gas reserves. One interesting way to do this is through Canadian royalty trusts (CanRoys). Similar to real estate investment trusts (Reits), the trusts benefit from tax incentives and by law must pay the majority of their profits to shareholders. The big difference is that CanRoys don’t buy property – they invest in the energy sector. As Mathew Emmert on Motley Fool puts it, they are “basically pure plays on oil and natural gas prices”.
The trusts do not develop energy reserves themselves, but concentrate on managing and generating cash flow from projects. When an oil reserve dries up, the trust generally raises money to purchase new properties through public share offerings.
One of the most attractive features of CanRoys is their high yields. Growing popularity among investors has seen these decline over the last two years, but yields still average 10% across the sector and more than 100 increased payouts in the last year, according to Royal Bank of Canada. The average dividend payout of the 73 trusts listed on Canadian and US markets is more than double the yield on Canada’s ten-year government bond, and almost four times higher than the average dividend yield of stocks on the Toronto Stock Exchange. Capital growth has been strong too. Canadian Oil Sands Trust, which invests in the Athabasca tar sands, is up 11% on the year.
The main risk to CanRoys is, of course, falling oil prices, which hit both the share price and the dividends paid by the trusts. But if you believe in the long-term oil bull, CanRoys should prove a good investment for some time to come. Richard Lehmann of Forbes recommends Canetic Resources and Harvest Energy Trust, which both yield 16%, while “investors seeking a growth play” should look at Enerplus Resources.