More warning signals for energy trusts

Gary Park

Petroleum News Calgary correspondent

Canada’s oil and gas trust bandwagon is growing less crowded as analysts warn that a five-year boom could be winding down.

A study by BMO Nesbitt Burns was the latest negative signal for 2004, with analysts Gordon Tait and Les Stelmach advising unit holders to brace for a downturn.

They predicted that “cash flows, and therefore distributions, will trend lower over the next few quarters.

“As a result, our target prices tend to be below current trading prices.”

The BMO Nesbitt Burns report comes on the heels of a study by Standard & Poor’s and other investment dealers who suggest that investments in oil and gas trusts are among the riskiest in the income trust sector.

Since a 25 percent drop in 1998 in returns to unit holders, energy trusts have made an unbroken bull run.

Last year, the S&P/Toronto Stock Exchange energy trust index rose 27 percent and, including distributions, posted a total return in 2003 of about 45 percent.

National Bank Financial said an average gain of 40 percent a year over the past five years is an “unsustainable pace.”

The S&P study said distributions “will be pressured as oil and gas prices vary and reserves are depleted.”

BMO Nesbitt Burns awarded “outperform” ratings for this year to: ARC Energy Trust, Canadian Oil Sands Trust, NAL Oil & Gas Trust, Peyto Energy Trust and Vermilion Energy Trust.

Canadian Oil Sands Trust, with a 35.49 percent ownership stake in the Syncrude Canada oil sands consortium, has a reserve life index of 35 years and an average 4.3 percent yield — far lower than the conventional trust companies, but more dependable.

With a 20 percent rise in its unit price in 2003, Canadian Oil Sands’ total return surpassed 25 percent.

At the high end, Peyto, which converted to a trust in 2003, notched a total return last year of 152 percent.

With a reserve life index of 16 years, compared with about 10 years for its peers, Peyto has also taken the unusual step for a trust of pledging to continue drilling rather than depleting its reserves, or building production through acquisitions.