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Trusts in state of flux Petrofund, Ultima deal could be start of merger wave, while offering possible answer to foreign ownership issue; Pengrowth introduces dual-class structure Gary Park Petroleum News Calgary Correspondent
Two Canadian energy trusts may have launched the sector on a new path towards consolidation after several years of rapid growth that has seen the creation of 28 trusts.
In the process, they will create a new entity that will comply with federal government rule changes setting a limit of 49.99 percent on foreign ownership.
When Petrofund Energy Trust announced plans to buy Ultima Energy Trust for C$450 million, moving it into the ranks of the top five trusts, industry analysts viewed the deal as the precursor of a merger wave that could see the big trusts swallowing their smaller peers which are having trouble building their production.
“It’s going to be a trend in the future,” Ultima President and Chief Executive Officer Brian Gieni told a conference call.
“As we have grown, so has the oil and gas trust sector — so much so that that the current Western Canada market is increasingly competitive, particularly for junior trusts,” he said.
The challenge for smaller trusts, which rely on acquisition rather than the drill bit to grow production, is to find properties in a tightening market, while the larger trusts are bulging with cash and ready to pay a premium for assets. New trust would have reserves of 112.54 million boe Assuming approval by Petrofund and Ultima investors on May 26, the new trust will have proved reserves of 112.54 million barrels of oil equivalent, proved plus probable reserves of 143.47 million boe and production of 93.5 million cubic feet per day of gas and 21,550 barrels per day of oil and natural gas liquids. The stock market value would be about C$1.7 billion.
Because the two trusts opened discussions in January, Petrofund Chief Executive Officer Jeffrey Errico said it is a “little bit of serendipity on the side” that the transaction occurred just after the Canadian government decided to cap foreign ownership of trusts, which enjoy a tax-friendly status.
Under the rules, the trusts with more than 50 percent offshore ownership — Petrofund 60 percent, Enerplus Resources Fund 64 percent, Pengrowth Energy Trust 53 percent, Provident Energy Trust 70 percent and PrimeWest Energy Trust 54 percent — will have to comply with the new limits by Jan. 1, 2007.
The Petrofund takeover of Ultima will allow it to reduce its non-resident ownership to less than 50 percent from its current 66 percent. Pengrowth asking approval of two classes of units Pengrowth has taken a different route, asking unit holders to vote April 22 to create two classes of units — Class B restricted to Canadian residents and Class A to foreign residents — allowing it to retain its listing on the New York Stock Exchange, while maintaining majority Canadian ownership.
Currently, Pengrowth estimates that 53 percent of its units are held by non-residents.
Pengrowth President Jim Kinnear said the strategy has been developed over “several months” after the trust detected a substantial pick-up in foreign investor interest.
He said the dual-class structure would limit the “amount of foreign ownership without disenfranchising the unit holders because both classes of units will still have the same rights and distributions.”
Kinnear said the “innovative solution” will enable Pengrowth to “maintain contact with both domestic and international markets” as it focuses on growth and expansion.
PrimeWest does not view the dual structure as a “silver bullet” to deal with the foreign ownership issue, but some analysts believe the approach will likely be studied by other trusts.
In other developments, the Alberta government intends to introduce legislation in the 2004-05 fiscal year to deal with trust liabilities, while the Saskatchewan government is pondering changes to its tax regime to put trusts and conventional oil and gas companies on the same level.
Alberta said it will adopt legislation confirming the limited liability provided to trust investors, putting trusts on the same footing as limited liability corporations and opening the way for pension funds to take a larger stake in the trusts.
Revenue Minister Greg Melchin said the action “is important to establish similar investor protection for (trust) unit holders as for shareholders.”
The Ontario government has promised to introduce parallel legislation this spring, confirming that unit holders in publicly traded trusts are not liable.
A provincial budget released March 31 by Saskatchewan Finance Minister Harry Van Mulligen drew attention to the fact that trusts are “generally able to avoid Saskatchewan’s corporation capital tax surcharge on their oil and gas production,” while conventional producers are saddled with the tax.
Without disclosing its preferred option, the government said it will consult with the oil and gas industry to help determine a course of action to address this situation.
In addition, Saskatchewan also plans to review the implications of federal plans to reduce the tax rate on resource companies to 21 percent by 2007 from the current 28 percent. The province said it was committed to ensuring a “competitive and fair” tax environment.
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