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Rocking the energy trust boat Oil patch financier Murray Edwards says corporate and trust tax rules are detrimental to Canadians; calls for end to foreign advantage, wants more funds in government coffers By Gary Park Petroleum News Canadian Correspondent
It amounted to possibly the strongest claim yet for changes to Canada’s energy income trusts and it could scarcely have come from a more credible source.
Murray Edwards would never be mistaken for a carping critic of the petroleum industry.
One of the toughest competitors in the Canadian oil patch over almost 20 years, he has rescued floundering companies and pulled off legendary deals.
He invested C$100,000 in Canadian Natural Resources in 1988 to help save the company from financial ruin. At last check his 2 percent stake in the independent was worth close to C$400 million.
Dubbed Mr. Patient Money by industry observers, he has been a key player in other companies such as Penn West Petroleum, Ensign Resource Group, Meota Resources and Rio Alto Exploration, building value through takeover coups and the drillbit.
In the process he has also become a partner owner of the National Hockey League’s Calgary Flames.
Edwards’ down-to-earth style has seen him take a contrary view of the scramble among small- and mid-size E&P companies to join the income trust ranks, building their reserves through acquisitions rather than exploration. Steps down as Penn West chairman in protest His persistent questioning of the trust trend boiled over May 26 when Penn West ended 14 months of agonizing over its future and switch from being Canada’s fifth largest independent oil and gas firm to become the largest conventional producer among the 30 trusts at 101,000 barrels of oil equivalent per day.
With the conversion, endorsed by 92.6 percent of Penn West shareholders, Edwards (who holds 3.5 million shares worth almost C$300 million and abstained from the vote), immediately stepped down as chairman.
And he did so with a detailed assessment of the trust structure, saying he is concerned that trust cash distributions are being made at the expense of capital investment, causing him concern about the “structure and long-term viability” of trusts – although he gave a special exemption to Penn West, saying he has full confidence in the new trusts management and the quality of its assets. Misgivings extend beyond industry Edwards even extended his misgivings beyond the industry itself to the drain on federal revenues from the trust structure.
He suggested the Canadian government will have to modify rules that put cash distributions in the hands of foreigners with only minimal returns to federal coffers and often none to the provinces.
Foreign investors in trusts are charged only a 15 percent withholding tax, compared with the 40 percent or more imposed on Canadians
Edwards pointed to the irony of funneling cash out of Canada at a time when the provincial governments are struggling to keep pace with rising health care and education costs.
“I find it challenging that we’re the only country in the world that basically allows income to be drawn from the country at a tax rate of only 15 percent,” he said.
He also pointed out that exploration companies pay taxes in the province where they are operating, while trust taxes go to the provinces where the unitholder resides. Reduce the gap in tax treatment Edwards suggested it is time for governments to reduce the gap in tax treatment between the distributions of trusts and the dividends that corporations pay to shareholders.
While dividends are taxed at both the corporate and personal levels, trusts are taxed only once – giving them an unfair advantage, he said.
Penn West president Bill Andrew said that discrepancy was what finally drove the company into the trust fold.
“We (found) ourselves taxable, we (found) ourselves not able to put out a dividend in a tax-effective manner to our shareholders compared to a trust, so there’s a bit of a niche created right now for trusts,” he said.
But the Canadian government has shown no sign of acting on the criticism of double-taxation of dividends.
Andrew also argued that the switch will broaden Penn West’s base to include more retail investors.
With a market capitalization of C$4.6 billion, Penn West produced 53,162 barrels per day of crude and liquids and 289 million cubic feet per day of gas in the first quarter, earning C$66.9 million.
It has 310 million barrels of oil equivalent of proved and 60 million boe of probable reserves, of which 49 percent is light and medium crude, 17 percent heavy oil and 34 percent gas. It also holds 5.8 million acres of undeveloped land in Western Canada.
The final week before the shareholder vote generated some other turbulence when the Ontario Teachers Pension Plan Board, Canada’s second largest pension fund with C$85 billion invested in assets, challenged plans to reward management and employees holding 900,000 stock options with C$95 million if the conversion proposal was adopted.
Teachers’ chief executive officer Claude Lamoureux said he objected to transferring a “lot of wealth” to management when nothing would change except the form under which Penn West would operate.
The board said it was ready to fight the matter in court, although Lamoureux conceded that Penn West was so widely held it would be an uphill struggle to sway shareholders.
In the end, Teachers backed down when Penn West agreed to count the votes from shareholders and options holders separately.
In the end option holders voted 100 percent in favor and shareholders have a 91.6 percent backing to the change.
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