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Providing coverage of Alaska and northern Canada's oil and gas industry
July 2007

Vol. 12, No. 26 Week of July 01, 2007

Pain could soon follow gain for trusts

Gross revenues, cash flows from operations and total assets were all inflated in Canada’s energy industry last year and they might be needed to cushion some bumps that lie ahead, warns PricewaterhouseCoopers.

In its 2007 Canadian energy survey, the world’s largest professional services firm reported that average gross revenues for the leading 100 E&P firms were C$1.4 billion, up 7 percent from 2005, despite the slide in natural gas prices.

Average cash flow from operations climbed 9 percent to C$436 million and average total assets rose 21 percent to C$1.93 billion.

Angelo Toselli, PricewaterhouseCoopers partner and energy and utilities practice leader, said 2006 was again a strong year for the industry, with “all sectors still enjoying solid results — a trend we don’t see changing anytime soon.”

However, the Canadian government’s announcement that it would end the tax-preferred status of income trusts in 2011 was unexpected, resulting in a “significant loss in market value of the energy trust sector,” he said.

The survey covered 32 income trusts in 2006, down from 36 in 2005.

Various options for trusts

Although the sector’s total market capitalization gained 4 percent to C$73 billion, the Standard & Poor’s/Toronto Stock Exchange energy trust index lost 4 percent, compared with the S&P/TSX index’s net gain of 4 percent.

Toselli said the good news for trusts is that they have three years to “reorganize and look at strategies” to cope with the tax changes.

While some will have problems surviving, others will try various options, such as converting to a corporate structure, merging with another trust, or looking to private equity to become a private trust, Toselli said.

The report also cautioned that the industry will likely have to carry a significant burden when the Canadian government sets short-term targets for reductions in greenhouse gas emissions and air pollutants.

PricewaterhouseCoopers Director Christine Schuh said companies will simply have to accept that climate change costs will become part of their business.

A 12-18 percent cut in GHGs would be a “significant change,” which the industry will not be able to implement quickly; leaving many to pay for emissions credits, or either upgrade or change equipment and technology.

The report said that given forecast economic growth in Asia and continued and rising geo-political unrest in some OPEC countries, commodity prices should remain high for the rest of 2007, although some industry analysts and government agencies do expect oil prices to moderate.

Natural gas prices should be marginally higher for 2007 as a result of higher demand, PricewaterhouseCoopers said.

—Gary Park






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