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Trust shakeout: Some stay, others quit Little consensus on Canada energy trust situation; tax issue expected to figure in next election; concern over foreign takeovers Gary Park For Petroleum News
The evolution of Canada’s income trust world continues to unfold, with some deciding to keep building and others bailing out.
Crescent Point Energy Trust forked over C$400 million to reinforce its dominant presence in the light oil Bakken play of southern Saskatchewan, while oilfield services powerhouse CCS Income Trust virtually completed its plan to go private.
Crescent Point landed a deal to buy Innova Exploration for C$400 million in cash and debt, almost a year after launching its successful bid to acquire Mission Oil & Gas in a C$760 million transaction.
The trust’s President and Chief Executive Officer Scott Saxberg said results from the Mission acquisition have “exceeded our expectations” and buying Innova “is a logical step in the sustainable development and control of the 1.5 billion barrel resource play.”
Under the deal, Crescent Point will gain 4,300 barrels of oil equivalent per day (72 percent of its crude), of which 2,800 boe per day comes from the Bakken area.
Innova also delivers 15 million boe of proved plus probable reserves and almost 200,000 net acres of undeveloped land.
As a result, Crescent Point’s production will increase by about 10 percent to 30,000 boe per day and its drilling budget will rise by 10 percent to C$165 million.
UBS Securities analyst Grant Hofer said the deal will allow Crescent Point to provide its unit holders with strong production and cash flow sustainability and significant reserves and value growth over the next few years.
He said that given the “compelling economics and attractive profile” of the Innova asset the trust should be well placed to “deliver solid, low-risk returns for investors for the foreseeable future.”
CCS goes private In contrast, CCS saw no future in the trust world and neither did the bulk of its unit holders, who voted 92.8 percent in favor of taking the trust private.
Their overwhelming endorsement of the plan includes a price of C$46 per unit — up 21.4 percent from the closing price when the offer was made — as part of the C$3.5 billion buyout by a group of private investors.
David Werklund, the founder of CCS who will remain president and chief executive officer when the transaction closes in the fourth quarter, said the Canadian government’s intention to start imposing a 31.5 percent corporate tax on trusts in 2011 was one of the factors pushing CCS out of the trust fold.
He said the new tax structure would not be in the interest of CCS stakeholders, who saw more value in the transaction that they were receiving from the public markets.
With 3,000 employees and four divisions processing drilling waste, marketing recovered oil, cleaning up old industrial sites and providing well services, CCS has operations in Canada, the United States and Peru.
The new owners will be CAI Capital Partners, Goldman Sachs Capital Partners, Kelso & Co., Vestar Capital Partners, British Columbia Investment Management, Alberta Investment Management and O.S.S. Capital Management.
Trusts an election issue Meanwhile the tug-of-war over the future of trusts showed some new life earlier in September when 35 executives from the sector met with two leading members of the Liberal Opposition, Ralph Goodale and John McCallum, who said that if they win the next federal election they will scrap the trust legislation.
McCallum said the anger over the proposed trust change runs so deep it will be a major issue in the election campaign, which is expected either this fall or in 2008.
McCallum and Goodale said the Liberals are also pondering allowing a broad-based use of the tax structure by all sectors, with restrictions to prevent initiatives solely designed to dodge taxes.
The Liberals have said they would introduce a 10 percent tax on all income trust distributions, which would be refundable to Canadian residents, rather than the 31.5 percent corporate tax under the Conservative government policy.
John Dielwart, chief executive officer of ARC Energy Trust and leader of the Coalition of Canadian Energy Trusts, said the trust law has already resulted in foreign takeovers of Canadian trusts, costing Canadian jobs.
“We’ve seen a very good business end up in the hands of foreigners and we’ve seen very good businesses end up with jobs at risk in Canada now,” he said.
Coutu: trusts on defensive Marcel Coutu, chief executive officer of the Canadian Oil Sands Trust, which owns almost 36 percent of the Syncrude Canada consortium, said the trust sector is now operating on the defensive instead of being in a strong growth position.
Investment banker Crosbie & Co. said the total number of income trust sales and acquisitions across the total spectrum surged 94 percent in the second quarter to 62 from 32 a year earlier, driving the value of deals up to C$12.2 billion from C$2.9 billion the first quarter and C$2.3 billion in each of the previous four quarters.
Colin Walker, Crosbie’s managing director, said he suspects the rise in trust deals mirrors the fallout from the government’s announcement last fall that it would break an election promise not to tax trusts.
“This is about the period when you would expect that people decided it was wise to put themselves on the block and make something happen,” he said, noting that trusts have now had time to assess their future and do the sales preparation.
Sayer Energy Advisors estimates that energy trust and assets worth C$4.5 billion changed hands in the first half of 2007, accounting for 18 of 104 oil and gas deals and 19 percent of the M&A enterprise value.
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