There seems to be no stopping the price of oil. Having breached $100 a barrel in January, it neared $120 this week, with grim predictions that it could rise further. On Monday, the president of oil cartel Opec warned that the price could pass $200 if the US economy continued on its road to recession and the dollar weakened as a result. “Each time the dollar falls one per cent, the price of the barrel rises by $4,” Chakib Khelil told El Moudjahid, an Algerian newspaper.
That’s bad news if you’re struggling to pay the heating bill. Unless, of course, you’re also an oil investor. If not, there’s several ways to play the rising oil price, including buying an oil exchange-traded fund, or as MoneyWeek has often argued, one of the hugely undervalued oil majors such as BP and Shell. But another less widely known option worth considering is to buy a Canadian oil trust, known as a Canroy.
Canroys are oil and gas companies that operate pretty much like real-estate investment trusts in that they are required to pay out most of their cash flow to shareholders in the form of monthly dividends. Instead of exploring and exploiting oil reserves like other oil companies, or even refining the finished product, they own companies that do it for them. The trust receives royalties from the operating companies, which it passes on to its shareholders. And when it wants to grow, it simply acquires other operators.
So why invest in a Canroy? First, the yield is high, usually between 10% and 15%. This income is paid monthly and in ‘loonies’, the Canadian dollar. This does introduce an element of currency risk, but as sterling is likely to weaken for the forseeable future, this shouldn’t worry investors unduly. Secondly, most Canroys are exploiting the Alberta tar sands. At a time when oil majors are fretting about their reserves, the sands contain enough oil to rival Saudi Arabia. It’s costly to extract it, but prices look set to stay high enough to reward the effort.
Trusts worth a look include Harvest Energy (CN:HTE-U), which yields 15.49%, and Pennwest Energy (CN:PWT-U). Yielding 10.76%, it trades on a forward p/e of 10, and has 11 years of proven reserves, one of the industry’s highest.