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Energy trusts show cooling signs Stronger Canadian dollar, new reserves rules could take shine off last year’s rapid expansion; trust unit prices off 2% this year Gary Park Petroleum News Calgary Correspondent
What went up at a blistering pace in 2003 could be edging down as Canada’s energy trust sector adjusts to two fundamental shifts — a stronger Canadian dollar that is deterring investors from the United States and a shake-up in reserves reporting standards.
On the upswing, nine new trusts valued at C$3.9 billion were set up last year, a 50 percent increase in the trust stable and more additions than in any year since 1996, giving the sector a combined market capitalization of about C$28 billion.
Topping the list of deals was Canadian Oil Sands Trust’s purchase of EnCana’s remaining interests in the Syncrude Canada consortium for close to C$1.5 billion.
In the process, more than 126,000 barrels per day of oil and gas liquids and 656 million cubic feet of natural gas moved into the trust fold, representing 236,000 barrels of crude oil equivalent — a 61 percent expansion from trust production at the end of 2002.
Last year’s additions alone amounted to 4.5 percent of Canada’s total crude and liquids output of 2.8 million barrels per day and 3.8 percent of its daily gas production of 17.4 billion cubic feet. Trust prices off 2 percent in 2004 But the long-predicted cooling off may be occurring, with trust unit prices off 2 percent so far this year, compared with a 4.5 percent rise in the Standard & Poor’s/TSX energy index.
Canaccord analyst Bruce McDonald is projecting that fourth-quarter cash flows for the trusts will drop 10 percent from the third quarter and this precedes an anticipated write-down of reserves when those results are disclosed.
Now that Canada’s largest E&P companies, with the notable exception of EnCana, have reported sharp reductions in their proven reserves — and all are exempt from the new Canadian disclosure rules — there is building anxiety over what will come from the trusts, who are not exempt and must start meeting the new disclosure standards no later than March 30. The first out of the blocks was Pengrowth Energy Trust, which kicked up some dust when it trimmed 7.1 percent or 15.3 million barrels of oil equivalent off its portfolio, with the bulk coming from a downgrading of Nova Scotia’s Sable offshore gas project.
PrimeWest Energy Trust added to the unease by announcing its second cut in monthly distributions since last summer. This time the cut is to 25 cents a unit from 32 cents effective March 15, following an 8 cent drop last August.
The Calgary-based trust blamed a number of factors, including lost gas output from wells in the disputed Alberta oil sands region, restricted production from another project and the need to retain some cash to boost output elsewhere.
Petrofund Energy Trust had earlier trimmed its distribution payable on Jan. 30 to 16 cents a unit from 18 cents, since when its unit price has dropped 11 percent, following a 17 percent decline in 2003. Two trusts boost reserves But there was more encouraging news from ARC Energy Trust and Peyto Energy Trust, with both boosting reserves.
ARC, lifted by its C$721.6 million acquisition of Star Oil and Gas last year, announced a 30 percent hike in reserves to 202.23 million boe, closing 2003 with 90.1 million barrels of proved crude oil and 600 billion cubic feet of gas.
ARC said it replaced 424 percent of annual production at a total finding, development and acquisition cost of C$8.50 per boe before consideration of future development capital for the proved plus probable reserves category.
Peyto said its proved developed reserves rose to 59.2 million boe from 44.4 million boe entering 2003. The company posted proved gas reserves at the end of 2003 or 326.62 billion cubic feet.
However, production per trust unit is estimated to be shrinking across a broad front. Reflecting the downward trend, Shiningbank Energy Income Fund and Viking Energy Income Fund both posted declines of 12 percent in 2003. S&P warns trust distributions could be at risk The rapid depletion of conventional resources in the Western Canada sedimentary basin and the prospect of commodity price volatility prompted Standard & Poor’s to warn last month that cash distributions from trusts could be at risk.
The trusts “had had a history of fairly high payout ratios, which further exacerbates the risks associated with their distribution sustainability,” the study said.
The authors said distributions have already begun to shrink as trusts allocate greater portions of their budgets to capital spending to maintain production.
In S&P’s stability ratings, the majority of energy trusts fell into the two most risky operating categories of SR-5 and SR-6. The sector’s harsh assessment of the S&P conclusions prompted a response from Steve Clouthier, president of APF Energy Trust, who said the risky nature of the funds is already known to investors: “I question why there is a continuing fascination with stating the obvious.”
Stephen Probyn, chairman of the Canadian Association of Income Funds, said the S&P ratings should not cause surprise, but he noted that a number of oil and gas trusts “have been very successful over the years at replenishing their reserves.”
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