S A ADVISORY August - September 2000
New Buy Recommendations: NCE - Petrofund / Cummins Engine Company, Inc.


S.A. Advisory
2274 Arbor Lane #3
Salt Lake City, Utah 84117

New Buy Recommendation
NCE - Petrofund
(Yahoo Quote - NCF_U.TO - Toronto Exchange; NCF. UN)
Recommended price $3.60 US

NCE-Petrofund is a closed-end royalty trust that acquires and manages producing oil and gas properties in Western Canada and distributes the resulting cash flow to unit holders on a tax-deferred basis.

NCE-Petrofund ("the Fund") is designed to provide investors with high levels of cash distributions through investments in the oil and gas industry. The Fund provides the benefits of owning producing oil and gas properties, without the exploration-related risks associated with investments in common shares of oil and gas companies. Unlike oil and gas companies, whose earnings are retained for reinvestment, NCE-Petrofund pays out all net cash proceeds from producing properties to the Fund' unit holders. All income flows to unit holders through monthly distributions.

2. Since 1989, the Fund has been acquiring and developing high quality, long life oil and gas properties and distributing the resulting cash flow through monthly income distributions to unit holders.

At present the royalty trust has 55 million units outstanding. The current production/day equals at least 11,700 boe (barrels of oil equivalent). The established reserves equals 49 million boe. The reserve life is over 11 years. During 2000 the reserves increased by 355%. The oil and gas balance 58% oil - 42% gas. NCE-Petrofund is the 5th largest oil and gas royalty trust in Canada.

NCE-Petrofund acquisition strategy:
1. Long-life quality assets.
2. Diverse oil and gas mix.
3. Secure geographical and geological diversity.
4. Expand portfolio of core properties.
5. Provide short-term cash flow with long-term stability.

NCE-Petrofund looks to achieve a rate of return of 15%, acquisitions must be represented whereby 70% of the purchase price equals proven reserves. In addition, 50% of the properties must have a production life of greater than 20 years and all major purchases are subject to an independent engineering review.

NCE-Petrofund's recent acquisitions of Crestar, July Lake, Weyburn & Kaybob cost $118 million (Canadian funds). The estimated reserves from the acquisition program equalled 24.6 mmboe (million barrels of oil equivalent). The cost or price/boe (barrels of equivalent) equals $4.79 (Canadian dollars). A very important factor needs to be magnified; that is, the oil and gas equivalent costs $4.79 CD, which in US funds equals around $3.40. The real picture, of course, is that in politically stable Canada NCE-Petrofund produces oil and gas in Canadian funds and sells the product for US Dollars. Recently oil has been priced at around $30/barrel. It is easy to see why the returns are mind-blowing! We get a stable country that borders the US, cheap, plentiful and high grade O & G equivalents, seasoned management, huge dividend payout (25%) and a juicy unit price of $5.30 CD or around $3.60 US, which should be priced at around double the current levels because the historical yield for trust of this nature within the US or otherwise should be yielding only 12%. This factor alone indicates the NCE-Petrofund could easily double from current levels.

During 1998 Petrofund distributed to unit holders (remember that the dividends are tax deferred) a total of 48 cents CD. During 1999 distribution increased to 61 cents CD. During 2000, running through July 31, 2000, the distribution has reached 74 cents CD. If NCE-Petrofund only distributes .11/month during the remainder of 2000, then our total dividend would equal CD$1.29 or around $.90 US funds. According to management, distribution of .11 to .12 CD would be based upon US $28.50 WTI (West Texas Intermediate) oil price and $2.60 Canadian gas price.

It is only natural to assume that with oil/barrel at around US $30/barrel and US $4.00/mcf (thousand cubic feet) for gas that the payout will be much higher than current estimates. It should also be noted that only 20% of the production is hedged! It is also our opinion that oil prices during the next six to twelve months will range between $25 - $35/barrel, while gas/mcf will see a low of $3.50 to a possible high of $7.00.

It is evident that the balance of 2000 will yield higher prices due to continued economic growth, limited non-OPEC supply growth, low inventories, constrained Iraqi output and the lack of supply to keep pace with the demand. Concerning natural gas, many utilities have switched to gas, demand continues to out-strip supplies, recent warm winters have had little affect upon prices. A severe or even normal winter could spike gas to within $6 to $7/mcf. With lower relative storage levels, strong demand growth, and higher crude oil prices, we see support for strong natural gas throughout 2000.

PS: Any severe weather within the Gulf of Mexico which disrupts production and flow of gas -- all bets are off and prices will be heading skyward.

We are extremely bullish towards NCE-Petrofund (NCF_U.TO or NCF.UN - Toronto Ex.) and believe that it belongs in every diverse portfolio that is geared towards capital appreciation and income with limited downside risk. In our opinion, NCE-Petrofund is the perfect investment! We have seasoned as well as quality management, a long-term track records of ever increasing growth and royalty income, cost of goods and services remain discounted 30% (that is O & G produced in CD$ and sold in US$), a gusher of a yield (at present 25%), and world oil and gas prices very firm and most likely heading higher, an investment vehicle not fully understood or have knowledge about (we actually anticipate listing of NCE-Petrofund within the US such as on either the NYSE, AMEX or NASDAQ), and let us not forget the tax deferred status of income received while the units are held! We rate NCE-Petrofund with a STRONG BUY recommendation at current levels; that is, around $3.60 US.

For a more complete overview of this company, please visit website http://www.NCEROURCES.COM; e-mail: info@NCERESOURCES; investor relations: 1-416-364-9297; main number 1-416-364-8788. Broker Contact: Greg Nelson at 1-801-256-2160.

We intend to monitor NCF_U.TO or NCF.UN in our master portfolio for percentage gain performance.

PSS: July 26, NCE-Petrofund closes a $48.25 million purchase of interest in Weyburn Unit.

July 28, NCE-Petrofund files prospectus for up to $30 million. Net proceeds of the issue will be used to fund new acquisitions, working capital, development projects in Western Canada and to retire debt. We view this as very bullish for continued growth of NCE-Petrofund and in the long term will benefit shareholders.

Finally, NCE-Petrofund (NCF.UN or NCF_U.TO) is a must own!

New Buy Recommendation

We intend to add Cummins Engine Company (NYSE:CUM) to our NYSE Orphan Portfolio for percentage gain performance. Current Price $32.

Cummins Engine Company, Inc. is a worldwide designer and manufacturer of diesel engines ranging from 55 to 2,700 horsepower. The Company also produces natural gas engines and engine components and subsystems. Cummins provides power and components for a wide variety of equipment in its key businesses: engine, power generation and filtration. Cummins sells its products to original equipment manufacturers, distributors and other customers worldwide, and conducts manufacturing, sales, distribution and service activities in many areas of the world. The Company has three operating segments: Engine, Power Generation, and Filtration and Other.

Book Value: $38.44, based upon 38,000,000 shares outstanding according to July 13, 2000 seconded quarter press release.

Revenue: six months, ending June 30th - $3.4 billion and net income/sh $2.70.

Anticipate revenue and earnings for 2000 have been slightly down-sized due to fears of new orders for heavy-duty trucks were dropping, foreign competitors, higher interest rates and a slowing economy. For the remainder of 00, earnings have been reduced from $6 to $5 for 00, that is, only another $2.30 in net income for the balance of 00. Revenues for 00 anticipated at $6.6 billion.

If we assume that Cum earns $5 for 00 and has a share price of around $32, then a PE of 6 results from simple calculations. Many believe that CUM is primarily a truck company - wrong! The company's other divisions, power-generation and filtration account for 40% of its sales and 75% of its profits this year. The power-generation business, whose operating profits nearly tripled to $30 million in the second quarter, is on a 21% rise in sales. Cummins is a leading maker of backup power generators for hospitals, office buildings, and other facilities, a high-growth market because more companies are seeking to protect their operations, increasingly technology oriented, from power outages and other disruptions. It is estimated that the standby generator market could triple within the next five years from a projected $5 billion in sales in 2000.

Cummins looks and feels very cheap, even when compared to other depressed industrial companies. It is currently trading at 6x earnings for 00, trading well below its stated book value of $38+ and only 40% sales, even when debt is taken into consideration. You should not forget the juicy yield of almost 4% to boot!

Wall Street never has any patience for temporary down turns in more classic businesses. The investment style of today resembles a lack of depth. If momentum is not in the picture, the stock will remain stuck in the mud. We at S.A. Advisory have always been a value investor, a bottom feeder and a contrarian. We hate risk and would rather own an out-of-favor Cummins than a pie-in-the-sky investment that could lose 50% of its value if even the smallest expectations were not met!

Many believe that if CUM splits itself into two or three parts, that it would fetch a greater value. In addition, it offers the appeal of being a take-over candidate. Anyway you slice, dice, grind or chew, CUM is a bargain at this periodic Wall Street fire sale for fundamentally cheap and depressed investments. We see limited downside risk, possible takeover potential, if CUM sported a meager PE of 12, the stock would trade at $60 not $30, and while we wait for all the "smart" money to get their heads out of the sand, we get an attractive yield of around 4%!

PS: Insiders were net buyers when stock traded between $32.94 an $36.81. This stock could also be propelled higher by the Fed loosening its reins on the money supply, fuel costs leveling off, new car and truck makers feeling more optimistic about the future and a pickup in construction. Finally, nine Wall Street firms follow CUM - they all rate it with an H-B. THEY HAVE NO BALLS!

We believe that a well-seasoned idiot could buy this stock at current levels and look like a rocket scientist within 6 - 12 months with a grin from ear to ear!

We rate Cummins (CUM-NYSE) with a strong buy recommendation.

Corporate # 1-812-377-3609; Broker Contact, Greg Nelson: #1-801-256-2160.

Back to top | Back to Newsletter | View Disclaimer

Copyright © 1998 S.A. Advisory