Advantage Energy Income Fund (AAV) – Part 3 - Outlook

Natural Gas Prices are expected to hold steady in the $7-$8 range for an extended period of time limiting the potential return for Advantage shareholders. The contrary opinion is that as gas-to-oil price ratio is the highest in history and should the oil prices stay high, natural gas price should follow suit to approach historical level for that ratio. In either scenario, Advantage is cushioned as they have been able to operate profitably when natural gas prices stayed around the $7 mark.

Advantage’s stock price performance over the last two years were well below average as the price slid from twenty something per share in early 2006 to be below ten recently. However it is noteworthy that in the previous four years the stock price did quadruple. The total returns including distributions over the life of the trust (formed 2001) has been reasonable at around 20%. The following factors in combination paved way to create the current attractive valuation for these trusts:

• Confusion regarding the effect of the tax changes,
• Concerns surrounding its increasing debt as Advantage funded several acquisitions with debt in the past two years, and
• The negative surprise for investors in the size of the latest dividend cut.

Below is a spreadsheet that shows how reasonable Advantage’s current valuation is using a number of measures:

Measure	Valuation
As a multiple of P&P reserves*	13.27
Relative to current yield	6.25
As a multiple of cash flow	7.35
As a multiple of Book Value (BV) based on 10% calculation	0.83
As a multiple of Per Flowing barrel oil equivalent**	59,705

• *Enterprise Value - $2.03B.
• **Production – 34000 boe/day.

Being a relatively small company with a fairly large amount of debt leaves Advantage vulnerable to a drop in oil and gas prices. This risk should be weighed against the fact that the valuation is very reasonable when making an investment decision.
To summarize, Advantage is an aggressive/risky holding operating on the gamble that energy prices will stay elevated going forward. Given the valuation and the tax pool status, it is a good choice as an income holding in energy portion of stock portfolios.

Related Articles:

1. Advantage Energy Income Fund (AAV) Analysis - Part 1 - Introduction.
2. Advantage Energy Income Fund (AAV) Analysis - Part 2- Business Issues.
3. Advantage Energy Income Fund (AAV) Analysis - Part 3 - Outlook.