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Trimming Canada’s energy trust sector
Gary Park For Petroleum News
The anticipated downsizing of Canada’s energy income trust sector has inched ahead with Advantage Energy Income Fund and Sound Energy Trust linking up to create a new company with an enterprise value of C$2.7 billion.
The C$257 million stock-and-cash deal results from Sound’s decision two months ago to explore strategic alternatives, including outright sale.
Although producing 10,000 barrels of oil equivalent per day in the first quarter, Sound had been stalled by a deteriorating market for smaller trusts, which prevented them from raising new capital under “favorable” terms.
The trust said it was no longer able to achieve organic growth from its “high-quality assets and extensive undeveloped land base.”
Sound Chief Executive Officer Tom Stan said the fact that the trust was trading well below its net asset value forced it to give up the struggle.
“We had a portfolio of opportunities (including 400,000 net undeveloped acres) that was too big for us,” he said. “Joining a larger entity will help get them developed.”
The new trust, which will retain the Advantage name, is forecast to end 2007 producing 35,000 to 36,500 boe per day, 65 percent natural gas and 35 percent light oil and natural gas liquids.
New company will have higher percentage of oil But Advantage Chief Executive Officer Andy Mah said Sound will add a higher percentage of oil to his trust’s production mix.
Taking on a higher ratio of oil is seen as desirable for most producers as crude prices cling to peak levels, while uncertainty dogs the gas sector.
However, the number of rigs active in Western Canada has increased in recent days and gas prices at Canada’s largest trading hub have reached a three-month high as a heat wave spreads across North America.
Mah said the new combination “affords us the ability to be very agile.”
If the deal is concluded in September, the new Advantage will have proved and probable reserves of 153.7 million boe and 760,000 net undeveloped acres.
It will also have C$1.6 billion of tax pools while Advantage gains about C$2 billion in “safe harbor” credits that gives it room to make further acquisitions.
Only one other upstream transaction this year In the upstream trust sector, the only other trust-on-trust transaction this year has been PrimeWest Energy Trust’s C$1.25 billion takeover bid for Shiningbank Energy Income Fund, while a private equity group is working on a C$3.5 billion deal to acquire CCS Income Trust, which has more than 3,000 employees involved in oilfield services.
In April, Thunder Energy Trust was taken private in a deal worth C$200 million.
Mah said the Canadian government’s decision to make trusts pay corporate taxes in 2011 was only partly responsible for the Sound deal, but the synergies between the two trusts were just as important.
He said the move to end the tax-free status of trusts has hurt all sectors of the petroleum industry, but “some confidence” has started resurfacing in the market.
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