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Quality prevails among Canadian trusts Number of energy trusts down; those that survived initial bloodbath planning for future, led by Penn West Energy, Enerplus, ARC Gary Park For Petroleum News
The 2006 Halloween mugging of royalty trusts by the Canadian government is starting to look like a trick morphing into a treat.
With 30 months to wait until Ottawa starts taxing trusts like other corporations, leaders of the trust sector have apparently decided that trying to cling to the past is a lost cause and that they’re better off preparing for whatever lies ahead.
It seems the government of Prime Minister Stephen Harper has won the day, despite breaking a promise to leave trusts alone.
When it opted on Oct. 31, 2006, to rewrite the trust rulebook rather than risk losing hundreds of millions in tax revenues, the government was faced with plans by EnCana to spin off one-third of its assets into a trust — a move that would surely have set off a stampede into the trust fold by the full range of Canadian corporate giants.
The ensuing financial bloodbath was accompanied by calls for the heads of Prime Minister Stephen Harper and Finance Minister Jim Flaherty on a platter. Time and reality seem to have done the trick.
Number of energy trusts down The number of energy trusts has declined from 37 at the end of 2005 to 31 by Dec. 31, 2006, and 26 entering 2008, with a host of once-popular names such as Fairborne, PrimeWest and Shiningbank reduced to historical footnotes.
Those who have survived are now busily rebuilding strength, helped by rampant commodity prices and shrewd leadership.
Meanwhile investors are again reaping rewards from trusts that are arranging their affairs to thrive once the tax change takes effect in 2011 by placing a greater emphasis on oil sands and heavy oil, shale and tight gas, stakes in Saskatchewan’s Bakken oil play, and even the more exotic longer-term opportunities in carbon dioxide floods and enhanced oil recovery. It’s a bit like taking a leaf from EnCana’s playbook and opting for an unconventional strategy.
At the top of the heap, Penn West Energy Trust has been thriving on its shopping spree, including takeovers of Canetic Resources Trust and Vault Energy Trust. It ended the first quarter with production of 192,291 barrels of oil equivalent per day (up 49 percent from a year earlier) and revenues of C$1.13 billion (up 94 percent).
Enerplus, the second-largest trust, enjoyed a 32 percent jump in cash flow to C$290.83 million from a mere 3.6 percent increase in production to 90,000 boe per day.
Penn West and Enerplus are as strategically placed as it’s possible to be in next-generation plays, with Enerplus looking to offload its 15 percent working interest in Total’s Joslyn oil sands project to concentrate on developing its wholly owned Kirby oil sands lease, with 244 million barrels of contingent resources, while hunting for assets in the United States.
ARC, with production at 63,000 boe per day, is another savvy player, having rounded up interests in 77,800 acres of Montney prospects and allocated C$125 million (25 percent of its 2008 cap-ex) to delineation drilling of the play.
It is also engaged in enhanced oil recovery initiatives, notably the Weyburn and Midale CO2 floods in Saskatchewan and is working on a CO2 pilot at Redwater, Alberta, where injections are scheduled for mid-year.
Critics now strongly placed Reflecting the pragmatism that has kept them thriving, the CEOs of Penn West, Enerplus and ARC (Bill Andrew, John Dielwart and Gord Kerr, respectively), were among the most outspoken critics of the government knee-capping of trusts.
But they apparently didn’t let their anger cloud their judgment or their vision. They are strongly placed for whatever happens.
Baytex Energy Trust, Progress Energy Trust and Crescent Point Energy Trust are also rated by Tristone Capital Vice President Christina Lopez as candidates to flourish beyond 2011.
In her view, jumping ship before 2011 and converting to corporations means the wasteful loss of tax pools.
Sayer Energy Advisors President Alan Tambosso says that although asset and property deal making has cooled from 2007’s pace in the first quarter, there is no reason to count trusts out of the marketplace, especially if they can target companies with substantial tax pools.
Consolidation is likely to see trusts who still have room to expand under the federal government’s limits-to-growth rules seek mergers with those that have hit their limits.
Investment dealer Peters & Co. has forecast median first-quarter payouts of 59 percent of cash flow — down from the median 66 percent in the final quarter of 2007 and a sickly comparison with the 90 percent and more that was common in the trust heyday.
Producer trusts doled out a total of C$6.72 billion in 2007 vs. C$10.57 billion in 2006.
FirstEnergy Capital is upbeat about the 2008 outlook, with cap-ex and distributions making a course correction from the cutbacks of 2007.
The next milestone for trusts is looming, with Flaherty promising to roll out “in a matter of weeks” the new regulations for converting trusts into regulator corporations.
There’s no indication whether that will seal the fate of trusts, or give them some more operating room. For now, they seem to have decided to play the hand they’ve been dealt.
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