Description

Acclaim Energy Trust (AE-U in Canada; ACNJF in US) C$13.70; US$ 10.40


While there are many worthy energy trusts up in Canada, I’ve only owned three: Advantage, Peyto, and Acclaim. Advantage was known as the best buyer of properties up there, as members are likely happily aware. Peyto has some of the best long-lived properties available. Acclaim was known as one of the best buyers of companies.

Acclaim really showed up on the radar screen with its merger with Ketch Energy in 2002. This helped Acclaim begin to get some critical mass. Subsequently, in 2003 Acclaim acquired Elk Point Resources in January, some properties in West Central Alberta in June, another property acquisition, Natural Gas Properties, in August, and Exodus Energy Ltd in December. As Members know from the Advantage writeup, the key metrics to watch with these activities are the PER UNIT measures and the total debt/CF ratio. Acclaim’s acquisitions were all flat to accretive in the per unit measures (CF, Production, Reserves, RLI, etc.) and debt levels were kept within traditionally reasonable norms. This is key and does “work”, since, as opposed to regular equity rollups, these guys actually pay you out most of the CF. (As Paulie would say in “Goodfellas”: “Pay me.”)

Two things have happened to take Acclaim from being a good value to being a great value. Late last fall, with NG selling off from the low 5’s to the low 4’s, and with the C$ rallying, I was afraid that Acclaim might have to cut its dividend. (Many other canroys were in similar straits, and some did cut the divvie.). NG subsequently rallied back and the C$ weakened, removing this threat. Then, at the end of May, 2004, Acclaim announced that they were the winning bid on C$433M in properties that CVX was divesting. The properties they acquired and the price paid was phenomenal; The acquisition is nominally 20-25% accretive to cash flow per unit, even after the secondary to fund it. The secondary to fund it was massive. AE was trading at C$13.35 before the deal; the secondary was done at C$12.25, subject to the deal closing. The acquisition has recently closed. Yet, due to the size of the secondary, there is still some overhang on the price. As the final stock from the purchase hits accounts soon, there may be some stock for sale; thus, as opposed to many ideas, this one should be very liquid. Acclaim was a good value at C$13.35 before the brilliant acquisition; it is a tremendous value now at C$13.70 after the deal. My conservative target for Acclaim is C$15-16 by year-end, with divvies along the way. My true expectation is somewhat higher since I am still bullish on oil and NG, and believe we’ll also see some yield contraction via price appreciation.

Some other salient facts about Acclaim. Due to losses carried forward from a previous shell, the divvies (15% yield) should be about 75% non-taxable ROC for the remainder of 2004. With this deal, Acclaim goes from being about the 10th largest UT to the 5th-7th largest depending upon what you’re measuring. This added heft and liquidity will make it more attractive to institutional investors. It may hasten a cross-listing with the US and a resultant lowering of capital costs due to price pop. (Compare Acclaim to Enerplus-ERF, which is crosslisted.) Canadian Fund-of-Funds do not yet have AE as their 5th largest holding, and as they become comfortable with AE’s integration of the pptys, they will be buyers. CF payout ratio has dropped from 90% to 70%. They have put some C$ FX hedges in place. They will likely put some NG hedges in place, but for now the new production is unhedged.

A while back I became comfortable with the conclusion that well-managed CanRoys like Advantage and Acclaim could continue to keep Reserve Lives and per unit metrics stable to growing…..as long as there were accretive acquisitions to make. I’d feared that as the CanRoy world grew, as NG rallied, and as properties became picked over, this might stop happening. Fortunately, it appears that the Majors have ridden to the rescue. XOM and others have billions of dollars more of mature properties that they wish to divest in Canada. And, the best buyers are the well-run CanRoys. Thus, these CanRoys can get great properties at very attractive prices. It could just be that these Roys are in an unbelievable sweet spot for some time.

Additionally, as PEY has become a moonshot, I’ve taken some of my PEY money and put it, along with fresh funds, into AE. I do this for two reasons. One is that PEY is very reliant upon a type of geology that many people (starting with me!) do not understand fully. The volatility of the ultimate outcome, both good and bad, is great. Secondly, PEY doesn’t participate in this divestiture-growth dynamic the way that Advantage, Acclaim, and others do.

Catalyst

Monster property buy combined with workoff of secondary overhang.