PrairieSky Royalty (PSK.TO)

A tricky company to assess, because there are all sorts of little things they can do. A royalty company, so they don’t really drill the wells. If the commodity situation is really bad and nobody drills wells and you are in a decline curve, your production goes down and there is nothing you can do about it. This company is still too expensive.

There are different kinds of royalty streams. Theirs come from surface to basement royalties that extend over a tremendous section of the country. It provides certainty for companies with a drilling plan. Their margins are excellent.

The chart is kind of a “go nowhere” pattern. These kinds of patterns don’t really interest him unless they break out one way or another.

Sell PrairieSky (PSK-T) and move to White Cap (WCP-T)? It depends on what your cost is in this company. If you have a good cost base and you have good money, he doesn’t think he would Sell to buy White Cap, although he thinks it is the best run of all the dividend companies out there.

(Top Pick, August 7, 2014, LONG Freehold Royalties down 37.94%, SHORT PrairieSky Royalty up 22.52%) Pairs trade, likes both business models. Felt that when PrairieSky came out last year it was overhyped and overvalued. PrairieSky was twice the evaluation. Prairiesky's yield was 3%, and Freehold's yield was 6%. When oil prices went down, they both went down. They exited the position in January.

This has done well. Has obviously had some challenges with oil prices. Their timing was unfortunate. Doesn’t have to do any drilling or rely on 3^rd parties. They have cash on the books. Recent pullback has given her an opportunity to add to her holdings. Dividend yield of 4.1%.

The secondary issue where Encana (ECA-T) sold the rest of their stake was done a $36.50, so this is an opportunity to pick the company up at a discount. He likes some of the attributes of this company. Dividend yield of 4.13% is very safe and sustainable. The company has no debt and a positive working capital. Have an undrawn $100 million credit facility. Likes the business model which is based around the fee simple lands, or the mineral rights that Encana used to own. They have 5.3 million acres of mineral rights plus gross overriding royalties on 3.6 million acres. Trades at a very high valuation multiple at about 26X enterprise value to adjusted cash flow, but it has a cost of capital to go to do additional acquisitions of these types of royalty interests.

They don’t have to spend any money at all. There is going to be some reduction in activity on their lands, but they are low decline rate fields.

Stock vs. Stock. FRU-T or PSK-T. Both don’t take on operating risk. When inflation creeps up they don’t have to worry about it. FRU-T is not a bad company. He would prefer PSK-T right now because it is bigger and did not cut the dividend recently, like FRU-T.

This company is definitely impacted by low oil prices because there have been large cutbacks in drillings. They are still profitable on all of the things that they have. The dividend would only be in danger if oil stays here in the $40’s for a while. 5.3% dividend yield is safe for now.

A royalty company, meaning that their cost structure is extremely low, less than $10 total cash cost per BOE. They don’t go out and drill. They have 3^rd parties come on to their acreage and drill. This used to act like a defensive stock but is now acting more like a higher beta stock, because there is a growing Short that they are going to have to cut their dividend. This is a small possibility, but as long as the price of oil remains over $50, they can easily support their 5.21% dividend. Big inside ownership.

They own royalties only. Millions of acres are under their control. They don’t have to put up any money to drill wells or process oil. They just take royalties right off the top. Fits well into 50 year portfolios like life insurance companies have.

Encana (ECA-T) has decided to Sell the rest of their position and did it at a fair discount. He had got some of the issue and sold it when it ran up. Stock has now been sloshing around. His feeling on value is $38-$40. He would like it $1-$2 down before it would be a Buy.

She is still not very interested in this. Provides a yield of about 3.5%, which is not huge. Have a huge land base and it is all royalty income, but they don’t really have control of how much the royalty holder drills. There is also some exposure to commodity prices. For yield, you could go somewhere else and get a more sustainable, visible cash flow stream. For gas exposure, she feels there are other companies that are more attractive.

(Market Call Minute) It’s too expensive now if you didn’t get it on the IPO.