7 replies to this topic

[dasein]

of c. 3.4%, but what I was wondering about is the dividend payout ratio is 114%, anyone have any opinion on whether they will take this reorg as an opportunity to reduce the dividend? klh

[PorkLoin]

Hey Special K, There's a good chance the dividend could be cut, certainly, but I see it being largely dependent on Natural Gas and Oil prices. Sequoia had a bad 2nd quarter, bad enough that the terms of the merger were changed; instead of each SQE share getting a full share of the new entity, now it's only .825 share (Big Bummer for shareholders there, and share price took a hit at the announcement). There were some flooding problems, and steps are being taken to make that okay. SQE revenue went down to $30.7 million CDN from $39.6 million CDN for the 1st quarter. Even while NG prices are way down, production should come back up and help to bring that 114% payout ratio down (2nd qtr. production was down 8% from the 1st qtr.) Additionally, Daylight is the larger trust, having 1st qtr. revenue of $68.6 million CDN, and a payout ratio of 80%. DAY = 61% NG production, 39% oil and Natural Gas Liquids. SQE = 69% NG, 31% oil + NGLs. 2nd qtr: SQEs production was 7,184 barrels of energy equivalent per day, while DAY's was 16,083. With no change, SQE's production would be 31% of the new entity, so (.31 x 114%) + (.69 x 80%) = 90.5%, thus with no changes the new trust's payout ratio would be 90.5% in theory, assuming both trusts were getting the same price for the products. The SQE portion of production *should* increase, so I'd think a little under 90% will be the deal. That's still too high, leaving not enough for exploration, drilling, acquiring new land or other companies, etc. Without higher realized prices versus the 2nd quarter I bet we see a 20 or 25% dividend cut. I don't know how much SQE hedges, but DAY wasn't at all. There should be some gains in efficiency and economy of scale with the new, larger trust, but 90% is just too high in the long run for an oil & gas trust. My personal opinion is that anything over 80% is nasty -- these are days of high costs for finding new reserves and getting the oil and gas. With DAY I think the market has priced in a good likelihood of a dividend cut. Yield is a hair over 15.2% now, pretty high as trusts go. SQE is just over 14.4% I own DAY (in fact it's 10% of my trust holdings) and I'm content to wait and see what happens. There is a lot of merger activity these days in the trusts and I'd be in no hurry to buy either one right now, per se. It's not like the shares of the new entity usually shoot up right after the merger. Evergreen's dividend is supposed to be 19.5 cents per share per month, which is a slight cut from the combined current dividends of DAY and SQE, so maybe's there's hope for no cut. If NG stayed up at $8 or more I'd say no worries, but that ain't lookin' great right now. On the arbitrage deal, I'm not sure what you mean, exactly (short DAY, buy SQE?), but 3.4% seems pretty slim to me to be taking a risk. For every SQE share, the holder gets .825 share of Evergreen, the new trust. For every DAY share, the holder gets .6642 share. SQE share also gets .0517 share of Trafalgar, a "high-growth, junior exploration company"). DAY share also gets .0417 share of Trafalgar. SQE share gets .0144 Trafalgar warrants, exercisable at $4.02 CDN. DAY share gets .0116 Trafalgar warrants, exercisable at $4.02 CDN. One's view on future NG and crude oil price should factor into the analysis, as well as the old "due diligence" and checking out the charts and indicators. My experience is that the exploration company spinoff doesn't do much as far as share price for awhile, if ever. If a dividend cut is announced for the new trust, there's usually a quick decline in share price. That's when I'd look to buy. Best, Doug

[dasein]

Thanks Doug - yeah, the arb is too small, but it is buy DAY, Short SQE, and you will end up with 3.4% in resulting shares left over - only for someone with no transaction costs! klh

[PorkLoin]

karen, this may be a dumb question, but how exactly does that work? Selling and buying equal Dollar amounts of each stock? Doug

[dasein]

Doug, I can hardly remember what I did yesterday, but it looked pretty basic to me, - I may be missing something... all I know is I didnt trade, but today, SQE went down and DAY went up... take just the stock part for illustration, as the warrants and stuff are proportional 1 SQE = .8250 * 'X' 1 DAY = .6642 * 'X' solve for X using the current stock prices (I used an intraday price yesterday), which ever one is cheaper - buy, sell the other in proportion. At merger you will realize the difference. people hunt these merger arbs every day, the best are cash arbs, but even they sometimes fall thru, making a mess for the arbitragers...its not for folks that have to pay a retail brokerage fee and margin rates... klh

[PorkLoin]

All right, thank you, Karen: SQE 13.21 / .8250 = 16.012 DAY 11.03 / .6642 = 16.606 3.64% in-between them. The spread widened today. Another way of doing the same thing is .825 / .6642 = 1.2421, so SQE should be that multiple of DAY, and any discrepancy could be traded. If you short stock, you pay the dividends, right? DAY is yielding 15.23% as of today's close, and SQE is yielding 11.99%, so one would be paying the difference if selling DAY and buying SQE, and receiving the difference if vice-versa. In looking at the press releases, I can't find when the merger is supposed to occur. For now, with that difference in yield, seems to me that DAY should be valued higher with respect to the final merger - you get paid more for waiting while holding it. Best. Doug

[dasein]

Thanks Doug - I didnt check when, thought it was soon, and also thought they pay qtrly, which is obviously wrong... thanks for correcting me! klh

[PorkLoin]

Ach, Karen, no thanks necessary -- my poor old brain starts hurting when trying to think of all the stuff for trusts.... (like in my wordy post above.) Don't get me wrong -- I like prolix verbosity as well as floribund circumlocution, but sometimes this money stuff is too darn hard. Tell you what -- look at some of the deriviatives going out there... :: shaking head :: Best, Doug