Trust merger plan goes down in flames

Gary Park

For Petroleum News

The Canadian government’s plan to tax income trusts has sent one proposed merger down in flames, with Shiningbank Energy Income Fund and Rider Resources bailing out of a C$496 million deal.

Unable to obtain government guidance on rules that will govern the trust sector, they announced on Dec. 8 that the deal they unveiled in September has been terminated.

Completing the transaction would have boosted Shiningbank’s proved and probable reserves by 24.8 million barrels of oil equivalent and its production by 8,800 barrels of oil equivalent per day.

But even before the federal government stunned the trust world by announcing its tax-favored status would be removed in 2011, investors were not happy with the planned transaction.

They said Shiningbank was paying too much for gas-weighted assets in the midst of a commodity price slump and at a time when the trust’s units had tumbled from a 52 week high of C$30.94 to around C$15.

However, Shiningbank Chief Executive Officer David Fitzpatrick pinned the failure of the merger on the government’s refusal to clarify the rules that will govern trusts in the future as well as its failure to indicate whether there would be any retroactive application of the rules to transactions that were in the works before the Oct. 31 announcement that trusts would be taxed at the same rate as conventional companies.

“We had sought clarity and hadn’t received it,” he said.

Guidance promised before Christmas

What makes the trusts anxious is Flaherty’s intention to prevent “undue” expansion of the trusts before 2011. Analysts have speculated that could mean a 15 percent cap on expansions.

Also in an uncertain state is a proposed takeover by Crescent Point Energy Trust of Mission Oil & Gas for C$760 million.

Crescent Point and Mission say they are still trying to evaluate the impact of the tax changes before deciding whether to proceed.

The only sign of the government’s thinking was a “comfort” letter from Flaherty’s department that encouraged Pengrowth Energy Trust to stick with its planned C$1.04 billion purchase of Alberta oil and gas assets from ConocoPhillips.

But the frustration in the trust world was expressed Dec. 6 by George Kesteven, president of the Canadian Association of Income Funds, who said that even if the government provides the details of the tax changes before Christmas it will likely take much longer to grasp the consequences.

“Part of the problem we have right now is there is no road map from the government over the four-year time frame,” he told the Calgary Herald’s editorial board.

“In addition to the lack of clarity around ‘undue expansion’ and growth no one has told us what we’re supposed to look like in four years. (Does the government) want us to convert to corporation?”

In a meeting with Flaherty earlier in December, the association representing 250 trusts covering a wide business spectrum, with about one-fifth from the energy sector, asked the minister to allow existing trusts to continue as they do now under the legislation.

Failing that, the association requested a 10-year transition period.

Kesteven said the market is in a state of “suspended animation until we get clarity,” adding that the “bad policy” of Oct. 31 is continuing to inflict damage.