An Energy Stock With Little Political Risk

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

JAMES PHIPPS
INVESTMENT ADVISER
EURO PACIFIC CAPITAL

COMPANY: Harvest Energy Trust
TICKER: HTE (NYSE)
PRICE: $31.60 (as of 4 p.m. yesterday)
52-WEEK RANGE: $23.85-$33.69
MARKET CAPITALIZATION: $3.18 billion

Mr. Phipps is a broker for Euro Pacific Capital, a company that primarily invests in overseas markets.He spoke yesterday with Katharine Herrup of The New York Sun about why he thinks Harvest Energy Trust is a solid way for Americans to diversify their investments.

What specifically does Euro Pacific Capital do?

We try to identify opportunities abroad that are undervalued because they are not well known. We are a full-service brokerage fund. We tend to specialize in international securities and commodities investing. Harvest stock is a foreign stock, but tradable on the NYSE. The dollar is going down and the companies are growing abroad.We feel very strongly that Americans need to diversify themselves because the dollar is actively being debased. They should be putting at least half of their assets abroad.

The average dividend yield in the U.S. stock market is producing roughly 2% and we’re investing in markets where the average dividend yield is roughly 7 or 8%.

Where is Harvest located?

It is a Canadian company. They’re based out of Calgary, Alberta. Thanks to the tax structure in Canada, they favor royalty/income trusts. The most known are the oil and gas trusts – Harvest is one of them. The Canadian dollar has been steadily appreciating as opposed to the U.S.dollar, so ownership of a Canadian stock in U.S. dollars terms goes up.

What does Harvest do?

They own oil and natural gas wells up in Alberta, Canada – crude oil is 75% of the company and 25% is natural gas. They extract oil and natural gas and sell it on the market.

Why do you like the stock?

What we like about them in particular is that this company is not situated in a politically unstable area. Owning interests in Canada is much more stable since there is a strong degree of political stability and Canada is a strong source for the U.S. in terms of energy. So an oil and gas trust like Harvest could become a very critical source of supply for the U.S. market. Unlike a lot of the major oil integrated producers like ExxonMobil or Chevron, Harvest doesn’t have any properties outside of Canada so they aren’t vulnerable to political climates like Venezuela and Russia where companies like ExxonMobil has assets. Basically, Harvest has no political risk.

You’re also minimizing natural disaster risk. U.S.-based oil companies have big properties in the Gulf of Mexico, so if hurricanes came through, that could be a huge problem for those companies.So from a geographical standpoint as well as a political standpoint, Harvest is in a safe place.

Why is Harvest a good stock among all the other energy stocks?

The most important thing to know is that it seems like the world is struggling to increase their output for crude and natural gas so we are in a bull market for that. Harvest allows the investor to benefit from increasing energy costs rather than being a victim in the form of higher electricity and gas costs. Harvest is like a natural hedge against increasing the cost of living for the average American consumer.That’s why investing in an energy company is a good idea because you are hedging yourself against an increasing cost of living in the form of energy bills and higher gasoline costs.

I would argue because energy costs tend to be volatile, most energy and natural gas stocks tend to be highly correlated to the fluctuations of the price of oil and natural stocks. In the case of a trust like Harvest, even though their ability to generate revenue is based on the price of natural and crude gas, they don’t do as much exploration, so rather than taking their profits and pouring them back into exploration,which is far more risky, they distribute at least half of their income back to shareholders.

What is Harvest’s yield?

Probably the most prominent reason we like Harvest is that they provide a dividend yield that amounts to 13% on an annual basis. Harvest is a dividend stock, but done on a monthly basis so that every investor receives about 1.3% of the total investment every month. Most dividend stocks pay on an annual or semi-annual basis. Also, the investor gets a favorable tax rate because dividends are only taxed at a 15% rate.

What type of person should invest in this stock?

We’ve held this stock since the ’90s. Harvest is perfectly suited to retirees and people who rely on their investment for income. It’s the safest way to leverage and hedge yourself against escalating energy prices. It’s also one of the least known ways to invest. People don’t realize they have opportunities to receive 13% yields.

What should investors expect from this stock?

It’s a long-term investment.This isn’t a home run stock, but it’s done extremely well. You should expect over time 20% to 25% returns, which is more than enough. I think the stock could be at $40 in 12 months.


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