Canadian Royalty Trusts Will Never Return to Their Former Glory 58 comments
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Someone (allegedly John D. Rockefeller, but no one is sure) said, "More people have been robbed of their money chasing yield than those that have been robbed at knife and gun point."
The Canroys
About 90 percent of Canadian Royalty Trusts, or Canroys, are based on a "Sustainable Business Management" model that pays out large chunks of cash flow from operations. Canroys avoided the "Blow Down" model, popular in the US due to a lack of sustainability. The Blow Down avoids debt, pumps assets dry and payout to shareholders can be up to 95 percent of cash flow. The Blow Down model attracted capital and seemed to justify the lower returns generated by lands that were on their last legs. The model also avoided risky exploration negating any large write downs that could upset cash flow along with upsetting investors at the breakfast table when they read the morning financial pages.
However, a problem occurs when management wants sustainability to keep right on going. So the Canroys implemented the "Sustainable, Accretive" model that incorporates active day to day management.
But Canroy management also wanted to avoid exploration risk, hence the practice of debt accumulation and share dilution for asset purchases.
For the last several years, the Canroys piled on debt and share dilution for acquisitions to keep the hamster on the treadmill.
Rarely did the Canroys conduct exploratory drilling. They didn't have to. Junior E & P's were more than willing to explore and develop properties, usually gas, achieve 5,000 per BOED production and then sell out to the Canroys at handsome profits. This quite literally became a racket with the same management teams selling out and then re-cycling themselves into another company and repeating the business model over and over again.
Rarely did the Canroys complain and rarer still did the Canroys comply with standard and accepted accounting definitions of "cash flow". Why bother with GAPP? It just gets in the way of the "Sustainable Model".
It was a "happy" time of seemingly unending lush dividends for unit holders, and rarely was there a discouraging word from management, investors and the brokerage houses and investment banks that produced mounds of investment data and brought to market E & P's who turned themselves into Canroys. Investors wanted yield and the Canroys could deliver.
Trick or Treat and the Destruction of Capital
It is truly an international world. A butterfly sneezes in China, causing a wind to blow down a forest in Oregon. A country one tenth the population size of the US has handed every US Canroy investor a financial setback totaling hundreds of millions of dollars.
The so called Halloween Massacre of 2006 occurred and everything changed. No longer could the Canroys buy production from E & P Juniors on borrowed funds or share dilution or by any means. The Canadian government put Safe Harbor Rules into effect that limited the amount of capital each Canroy could raise for further acquisitions. This restriction is devastating to Canroys ending production growth, as we will see later.
Also, as part of the Halloween Massacre, Canroys will be taxed at higher rates starting in 2011.
Then, 2 years later, as in now, the banks and insurance companies lost a bundle on sub-prime CDOs and credit swaps, and are continuing to lose money. The result is that lending dried up and Canroys have recently turned to private placement and share dilution to raise funds.
What will the Canroys do? There are several options.
- Do a Blow Down, pump assets dry before the tax change in 2011.
- Convert to an E & P corporate and financial structure.
- Convert to a Master Limited Partnership, (MLP) in the US.
- Sell to anybody for the best price.
- Something else.
Numbers one through four are self explanatory, with the caveat that option number 3 could run into newly proposed Canadian Law designed to thwart a US MLP move backed by Canadian assets.
Let's look at option number 5.
Option 5 is mentioned in every Canroy annual and quarterly report, usually worded that management is keenly aware of the tax change in 2011 and leaves all options open including corporate structure change. Then in Management Discussion or elsewhere, management points out that the Trust has built significant tax pools. Tax pools large enough not to incur Federal taxes for up to another 2 to 3 years after 2011, thus implying the Trust will maintain and keep paying its dividend, which after all is the rhyme and reason we all invested in Canroys.
The average investor, particularly the US investor, concludes that Canroys will continue on as a Trust in structure if not in name, and at the least it will carry on as a Trust in lush payouts.
Under the new Canadian Tax Law for 2011, with the appropriate acronym of SIFT, as in sift all the money out of investors' pockets, US investors, along with their pension funds, will not fare as well as Canadian Investors who have their Canroy shares in an approved pension/retirement fund.
A quote from Penn West's (PWE) 07 Annual Report goes as follows:
If structural or other similar changes are not made … For U.S. investors, the distribution yield net of the SIFT and withholding taxes would fall by an estimated 25.1 percent in 2011 and 23.8 percent in 2012 and beyond.
Penn West has Tax Pools that PWE's management claim will make the company "Tax Free" at least until the end of 2013 and maybe longer. All Canroys make such "Tax Pool and Tax Free" claims.
While the Canroys, with their tax pools, maybe able to fend off a Federal Canadian tax hike for awhile, the US investor gets the Bums Rush, regardless of tax pool accumulation.
Currently, there is only a 15 percent Canadian withholding for US investors. Do not expect a structural change. It appears that even with tax pools shielding Canroys from Canadian Federal Tax, US investors still get a whopping 50 percent withholding increase after 2011.
Ah, but the US investor gets a tax credit from his or her government right? Yes, but maybe not for long. Another ominous cloud on the horizon lies in Congressman Markey's (D. Mass.) proposal to cancel the withholding credit currently enjoyed by US investors under current tax code. Congressman Markey is a dedicated Marxist – Leninist who is determined to destroy capital accumulation for all individual US investors. If the Democrats' campaign rhetoric is an indication, Markey will soon have plenty of company in the Congress looking for additional revenue. And the US investor is one of those sources.
Asset Whack
The new Albertan Provincial Royalty Tax will hit the Trusts on their conventional production in 2009 with at least a 10 percent increase, to as high as a 20 percent increase in additional Royalties from current Albertan Royalty levels.
Conventional oil and gas production bears the brunt of the higher Albertan Royalty, and most Canroys are in the conventional business. It should be noted that in most annual reports, the Canroys poo poo the hike as not being worthy of the investors' concern. The prime example here is Penn West, which has maintained that the higher royalty will only affect the company "minimally".
However, no less than Kurt Wulff himself dropped Penn West's asset value by 12 percent, not on the lower prices of oil and gas, but solely on the higher Alberta Royalty. One wonders what happened to all the other assets of Canroys doing business in Alberta that Mr. Wulff doesn't follow. Are their assets written down, did they report it to the shareholder, or is Penn West the only recipient of this distinction? I doubt it.
But I can only quote the late Illinois US Senator, Everret Dirksen, who once said, "A million here and a million there and pretty soon you are talking real money." The higher Alberta Royalty is "Real Money".
The Alberta Hike
One Canroy CEO is taking the Royalty hike seriously. Penngrowth's (PGH) CEO is talking about going overseas to find new growth. His reasoning: the Alberta Hike in his view, presents a material obstacle for his company's future growth in Alberta. He states that the returns aren't there. Not "minimally" indeed.
But, why bother to go overseas? Just become an E&P or an MLP or something. Why all the trouble? Why venture internationally where only 2 Canroys have roamed. Why not stay and buy up all these great Western Canadian Sedimentary Basin assets (WCSB) like Penngrowth did recently with a purchase of 1billion dollars of Chevron Canadian assets.
The WCSB's best days of conventional oil and gas production are over. Conventional drilling has headed for British Columbia, Saskatchewan, the Yukon and the Northwest Territories. But in these lands the words "infill" and "step out" drilling are still rare due to the newness of the finds and the expense of development. Step out and infill drilling, along with acquisitions, were the Canroys' bread and butter. Here, in the other provinces, there is only high risk exploration, hitherto shunned by the conservative Canroys.
The prizes that remain in Alberta are unconventional assets that require a lot more capital and yield a lower ROI no matter the price of oil and gas as compared to conventional production.
Only large volume production for oil sands works and only a large and long life reserve with a multi billion dollar commitment works for shale gas as stated by Birchcliff Energy (BIREF.PK) on its estimate to develop its Montney Shale holdings. To be precise-1.5 billion dollars so says the Birchcliff CEO.
A New Era for Canroys?
That is a whole new ballgame, and the Canroys' reaction to it can be easily measured by Penn West and Enerplus (ERP) who have large if not substantial unconventional resources, and who so far for all these years just twiddled their thumbs on their tar sands. Their focus was on the more conventional side with the usual secondary recovery operations where warranted.
In fact, Penn West and Enerplus, instead of developing the large un-conventional asset base, have chosen to purchase conventional assets instead.
Enerplus this year sold its Deer Creek Oil Sands holdings and maintains a slow production approach to its Kirby heavy oil resource. Not exactly risk taking that builds empires.
The Hamster Standing Still
Let us look at the 5 biggest Canroys traded on the NYSE. They are:
Penn West, Enerplus, Penngrowth, Advantage Income Trust, (AAV), and Baytex, (BTE).
These 5 Canroys hold the largest US shareholder base. Remember sustainability and how important it is to the Canroys. Here are some interesting numbers for the above 5.
Proven Producing FD&A Costs for 2007
Simply stated, this is when a company takes its proved but undeveloped assets and places them into production. It shows the carrying costs of the asset base. It is oil and gas combined BOE.
Important Note: The average price for a barrel of crude for 2007 was $72.10 per barrel.
- PWE: $27.00 per BOE
- ERP: $42.00 per BOE
- PGH: $18.00 per BOE
- AAV: $27.50 per BOE
- BTE: $23.00 per BOE
Operating Costs
Now let us use the Q2, 2008, (the most recent numbers available) Operating Cost numbers on a per BOE basis.
- PWE: $13.00
- ERP: $10.00
- PGH: $16.00
- AAV: $14.00
- BTE: $16.00
The Canroys are limited in their capital formation and their acquisitions and do not explore. Thus the 2007 FDA proved cost numbers gives us a recent historical cost basis, which is a legacy cost when dealing with an acquisition and combining them with the most recent operating cost numbers gives us a good handle on what to expect with the collapse of oil and gas prices as we go forward.
Total FDA and Operating Costs Per BOE for Proved Un-Developed Assets
- PWE: $40.00
- ERP: $52.00
- PGH: $34.00
- AAV: $41.50
- BTE: $39.00
The coming year, with prices below $60.00 per BOE, is not going to be good for these Canroys, nor for their investors. The current collapse of these Canroys' unit prices reflects the low prices of oil and gas and probable payout cuts that reflect the true risk reward ratio of the units.
But the largest "Fear Factor" on these Canroys is the Effective DD&A Re-Cycle Ratio. This ratio indicates how many BOEs you can add with the remaining cash flow, after distribution payout, for each BOE you produced. A 1 to 1 ratio means you are treading water and can produce 1 new BOE for every BOE you produced.
More than a 1 is good. Less than 1 means you are not replacing production at all after payout.
How did these Canroys fare for 2007 when oil averaged $72.10 per barrel?
Not a single one achieved a 1 for 1 ratio. All were less than 1. In other words, they are dying. They are dying with costs taken from past quarters where oil and gas prices were much higher than they are now. That should be staggering to any investor.
Put another way: These 5 Canroys are in a Blow Down model whether they realize it or not, or admit it or not to the shareholder.
But unlike US Blow Down Trusts, these Canroys have debt, in most cases greater than a 1 to 1 ratio and they have active and high management costs. And for what? Management's job is to achieve sustainability but there is none. So who needs management?
The Party Is Over
The Canadian Government took away the punch bowl, kicked everybody out of the dance hall, and turned off the lights.
Canroys needed debt, they needed acquisitions, they needed the cheap funds they borrowed garnering larger returns on oil and gas with pricing seemingly run amuck. Only in that way could they afford to pay higher and higher prices for marginal assets and ignore GAPP Accounting Rules and call the purchase "Accretive".
When the Canroys couldn't acquire more assets due to Safe Harbor Rules, when the Canroys couldn't attract more US investors with expected high yields devoid of deathly Canadian withholding, when the Canroys had their assets whacked by a higher Alberta Royalty, when they all suffered due to an un-precedented collapse in oil and gas pricing - where they all are suffering now from higher priced asset purchases, and why did people still hold the Canroys?
Yield baby, yield.
As long as oil and gas prices stayed high and higher, the day the Black Swan would take His Due seemed so far away. So hold baby, hold.
The Future
Clearly, the Canroy structure no longer works with all the rule changes and credit markets drying up. Those Canroys who seek true sustainability will convert to corporations particularly if they are included in the proposed Canadian corporate tax reduction.
They will eliminate their payouts and return to a true E&P structure. Only by eliminating payouts can the Canroys pay down debt and add to reserves in an "honest fashion."
By now investors should understand that Canroys are not E&P companies at all.
Some may start to conduct themselves as a Blow Down Model with reductions in staff, vast reductions in costs and pump the asset dry over the next 8 to 10 years.
There can be further difficulties for Canroy investors with management taking chunks of land out from the Trust and placing un-developed assets with a wholly owned or partially owned explorco while the Canroy holds all the debt that purchased the assets.
All shareholders should reject this model. Keep your lawyers at the ready.
But what is clear to me is that the Canroys will never be what they were no matter what the price of oil. Why? The rules changed and no one wanted to believe the worst could happen with the high price of oil.
Can oil and gas return to former pricing? I doubt it until after 2011 or 2012, placing the new restrictions in effect. Even so, these 5 Canroys have not demonstrated an ability to increase reserves after payouts no matter the cost or price of oil and gas.
A Silver Lining
One of the reasons Canroys avoided exploration was that it made their cost of capital cheaper. That no longer applies. Turning back into an exploration company can be positive for the shareholder who is now under water with his or her unit purchase price.
Penn West is a good example for this approach. Eliminating the current payout entirely produces 1.5 billion annually for purchases, expedited debt reduction and increased funds for drilling. The investor makes it up on the increasing share price. That 1.5 billion is what Birchcliff needs to fully exploit its Montney Shale holdings.
The Canadian Junior Explorcos are in deep trouble. A good number have excellent prospects and no cash for exploration. The Canroys can step in and pick up bargain after bargain if only they would convert to a corporation and slash the payout.
Buying up small explorcos on the cheap or spending money on high impact drilling will do far more for the beaten shareholder than stubbornly clinging to the current model.
The one silver lining for all Canroys is that they have cash flow. But when and how will they use it to improve the lot of their shareholders is anyone's guess.
It is clear that the market responds positively to large reductions in debt, large retained earnings and improved drilling prospects.
The Canroys are in the perfect position to "Buy Straw Hats in the Winter".
Their strength and the salvation for their shareholders lie in being counter-cyclical. They have the money to do it. But will they?
A Ho Hum Approach
A possible scenario is that the Canroys will continue the high payouts until 2011 and then do a "Due Diligence Review" where the Board will implement the conversion to a corporate model. That seems to avoid most litigation efforts by shareholders large and small alike.
It also may wipe out any chance of truly accretive asset purchases and long term sustainability for the company and its shareholders. Waiting could lose the moment.
Recommendations
I have no basic recommendations for this class of investment except to say if you have ridden it down this far, you might as well stay put and see what happens.
But on second thought, I do have some recommendations for US shareholders. Demand, don't ask but demand, that your Canroy start the process of slashing payout, paying down debt and buying cheap assets.
Demand the conversion to a corporate model, demand that your Canroy lobby the Canadian government for oil and gas companies to be included in the Corporate Tax Reduction Act.
Or simply demand a Blow Down Model with no gimmicks and with vast cost reductions. Either way you will be better off than you are now.
Conclusion
Chasing yield is not good. Rockefeller was right.
Stock position: None.
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This article has 58 comments:
1. Less (not more) oil and nat gas production.
2. Less (not more) tax revenue.
3. More (not less) opportunity for Foreign investors to swoop in and buy up cheap assets.
4. Increase the likelihood of these trusts becoming more like an ECA, or IMO whose effective tax rate is 10%. Is that what Ottawa really wants out of their strategy? Talk about the "Law of Unintended Consequences."
Finally, Let's just set the record straight on why there was a Halloween Massacre to start with. Flaherty and his cronies basically caved into the pressures of "Big Insurance" (can you say Manulife?) who despised the thought of Candian investors avoiding their crappy and expensive retirement products in favor of a self-directed low cost/high return investment like the CANROYs. Never did Flaherty and his crooks expect the firestorm they got from private investors. In 2011 we will see a massive move to MLP structures (USA) or a conversion to an Encana-like corporate status. Trusts with the most tax pools like PWE and ERF will fare the best. Who knows what will happen to the rest. Meanwhile the trusts have basically given Alberta the " middle finger" salute. I sat in on a recent ERF investor presentation. Most if not all of their 2009 and 2010 CAPEX will be focused on Saskatchewan and BC, not Alberta. It's going to be a long, hard cold winter for those greedy Alberta politicians. Freeze, baby freeze.
The mexican oil field is drying up and they are a major supplier to the US. In 5-6 years they will be an oil importer. The dollar will depreciate against oil and gold and the Canadian dollar will rise in value.
These canroys are extremely valuable to the US in the near term from the Mexican decline alone.
Flaherty held out the olive branch to the Canroys with a convert now and you will be included in the lower corporate tax act.
Why wait?
The author uses 2007 oil statistics and applies present prices and economies of scale on them alone. What has not been taken into consideration is the value of the Canadian Currency.
Last year the Loonie averaged near parity with the USD, in fact well into this year. Now it is around .80. They sell in dollars and convert into Loonies $48 dollar oil is 60 canadian. They were losing money on a currency translation basis when the Canadian Dollar was above parity.
Next, as the author says, while Canadians may continue to receive the dividends unhampered, I certainly believe that they are as equally perturbed as we are about the valuations of their investments. I doubt whether they will remain sanguine on the subject during Canadian Elections. IMHO
Next, Do you actually believe that Virtually Simultaneous stimulus Packages throughout the world will keep Oil prices below $100 given your statistics on supply reductions from Mexico, Russia, etc.? If so, please continue to bury your head. A Famous Accounting quote "Figures don't Lie, But Liars figure."
On Nov 24 10:08 AM steve Ward wrote:
> Gentlemen, succinctly, the point is they are not replacing production.
> Why wait until 2011?
Please sell your shares, I'll be buying them.
They would, if they could. That was one of the points in the article. 3 sources for purchase: diverted distributions, debt or equity. None all that attractive or available.
Bud Harvey
I'd refute your estimations of total cost of productions like $35 not to mention $40/bbl > I used to be in the US business and our costs were $10-$25 max and having worked with Canadian oilmen I don't think US oilmen were any smarter or more heavily taxed remember the Windfall profit tax in the 80's well that above $20-$25 includes that burden.....
On Nov 24 10:08 AM steve Ward wrote:
> Gentlemen, succinctly, the point is they are not replacing production.
> Why wait until 2011? The heck with why they did it, the government
> did it. The US investor fares the worse. Why wait when assets will
> be cheap for a period of time?
> Flaherty held out the olive branch to the Canroys with a convert
> now and you will be included in the lower corporate tax act.
> Why wait?
Or are you just totally Bearish on the Canadian Oil Trusts..you fail to mention US oil trusts such as BPT and Mexico Oil Trusts in their UMS bonds which by the way seen a size able increase in Price???? BPT has shown a huge drop in production ie from 400,000 to 300,000 bbl of oil per day in less than 13 months(I don't see BPT stock at sub basement prices like the Conroys see BPT$74/share vs PWE $13.60/share now vs BPT $108/share and PWE's $35/share this spring-summer 2008).
As an oilman a 25% drop in production over 13 months time especially at the end of its projected production era is far more terrifying than the prospects of future questionable tax burdens under any circumstances...so why aren't shares of BPT dropping??? Congressman Markey's (D. Mass.) proposal to cancel the withholding credit currently enjoyed by US investors is not a certainty nor do you know for a fact that the Obama folks will even act on it remember they put Richardson as Commerce secretary, and he’s shown a lot of conservative taxing ideals in the past….
Top suppliers of oil to the US
Crude oil imports (thousands of barrels per day) August 2006-August 2007
Canada 1853
Mexico 1448
Saudi Arabia 1427
Venezuela 1120
Nigeria 1025
Angola 524
Algeria 509
Iraq 481
The U.S. stimulus measure was economically harmful, and the prospective one will be harmful also. (That's because it was money transfers at gunpoint.) Any stimulus plans by foreign governments will do only harm, unless those politicians have been visited by an angel. I don't expect any investor to agree, but would it change your actions if I were right?
To Xiang2chu and searcher:: Canroys cannot make the large acquisitions due to Safe Harbor Rules. They have to become corporations. Frankly,did youn read the article? It clearly states that assets are becomming cheaper but Canroys are limited in buying them. And PGH and PWE did not share your concerns of high priced asset purchases when they bought several billion dollars worth of high priced assets from Chevron and Canetic respectively in the last 15 months..
To Harley the Brave: I have a direct ancestor that fought on the winning side in 1776. Entire family has a phobia about the word Royal
To paultaut: I have enjoyed your bullying over the last few months, now it is my turn: Youn are a partial idiot. I won't call you a complete idiot because it appears you know how to type. The Canadians already had their election on October 14th and they re-elected Harper. The anger of Canadian investors--where. Show me the grass roots ground swell that will roar the Canroys back. Also, I am pleased to hear that currency rates and swaps will soon stop the bleeding of production in the 5 Canroys I mentioned.
ToThor_9128, your argument is not with me on the numbers but rather with CIBC World markets and other Canadian houses that publish the data. Also, I've owned BPT for my account and for my moms.
I am saying this gently, unlike to paultaut. BPT is a blow down model and it is 100 percent oil and NG liquids. There is now gas portion to stink up payouts on wild fluxes. Also, it does not have debt and it it is guaranteed a percentage of the "First" 90,000 barrels pumped which generates approximately 14,500 barrels a day for BPT. So, it does not matter one whit to BPT that Prudhoe production has slid dramatically. It will never matter as long as 90,000 BOED are pumped. BPT Royalty holders will always receive their full and not a partial share. Thank you for bringing up BPT, it dramatically shows the benefit of a blow down or pure royalty trust without hedging and outrageous costs in management. BPT proves my point.
To: paultaut: stimulus will be pushing on a string. Stimulus won't kick but hyper inflation will. Like I said, you have a wait of until the last quarter of 2010. Most of these trusts are gassy. US has a lot of gas comming on stream in 2009 and 2010. Good luck.
To: yank: you have valid points. Ottawa wanted the wealth spread out to the other provinces. Kill the Trust structure first than have your buddy "Honest" Ed Stelmach whack conventional production to push it even further out. Stelmach gambled on unconventional oil and gas production that is why the Alberta hike favors un conventional producers like Ember and the deal Marcel Coutu got from Alberta this last two weeks. It was a sweetheart.
The whole thing was planned. It was planned, it was planned and it was planned. It was a conspiracy. Just look back and see how all the pieces fit together so well. This was not happen stance, it was deliberate. And so far it has worked to perfection with Harper winning re-election one month ago and Honest Ed getting re- elected earlier.
China will not take over Canadian assets in Canada unless the Harper government invites them in. Harper has hung out a "Chinese Not Welcomed" sign. The Chinese have been burned with the Northern Lights ptroject and find doing business with Chavez and African dictators more rewarding.
Also, many investors I have spoken to have used the words E&P in describing the Canroys. That is the only reason I mentioned it. But these investotrs, mostly novices, are not idiots. The Canroys constantly use the word, "sustainability" in their presentations so an investor would logically assume an E&P type company.
Tax Pools are the slappy, clappy, happy spin of the PR departments. Any Canadian analyst will tell you that anybody drilling has a tax pool. Penn West has the biggest of tax pools yet it has done nothing to increase the DDA.
2007 numbers are valid. They present a recent historical cost. 2007 numbers are based on proven assets not probable assets. Which makes the number even more freighting. 2008 numbers in production costs applied to 2007 legacy costs are valid. Show me with numbers and logic why they are not. Apples and oranges comparison says nothing to refute my analysis.
ToJE: I have no idea how you might think Canadian oil is going away from article.
To bharveyalamos: why wait until I sell. Obviously many other people are selling as judged by the price collapse. Double down and tell us about it. Sell other assets buy more Canroys. Don't even tell anybody that you are placing orders you want to get your fill orders on the cheap. Go margin if you can. OK
To smsnead32: Wait until oil hits a bottom and then comes up. Buy the ones with the largest percentage of oil production. Buy the ones with a DDA greater than 1. Buy the ones where thje management is damn smart and buy the ones where management defends the shareholder in all the public arenas.
There are only two: Crescent Point Energy Trust and Canadian Oil Sands Trust. None of these trade on the NYSE, thank God. Get an international account. Crescent can be bought on the over the counter exchange along with Canadian Oil Sands Trust.
Marcel Coutu, CEO of Oil Sands Trust has the heart of a lion. Every time he has put the shareholder first.
Steve Saxeberg of Crescent along with his management team are the smartest guys out of the Canroys along with Coutu. They have the best hedging strategy for it has a single purpose onlty, to protect the payout until the end of 2010.
They are also counter cyclical in their thinking. They buy straw hats in the winter and they have developed a brilliant plan already implemented to go around the Safe Harbour Rules. gGod luck.
That will give you time to read a newspaper, see a movie and generally get ou and have some fun.
This could work.
On Nov 24 06:57 AM apppro wrote:
> WOW! What a LONGGGGGGGGGGGGGGGGG article that no one will read just
> to try and prove out his short posItion.
That's what it does best.
However well Steve has researched this article, however, I must take it with a grain of salt when he cannot correctly spell the acronym for Generally Accepted Accounting Principles.
Nearly everything that has been stated is completely or partially incorrect. From which level of government enacted the new royalty trust structure to how the royalty flow through structure works to foreign ownership limitations to the rules on trust conversion.
1. Unit trusts do not produce dividend income - they distribute either return of capital or a portion of income generated. This is a notable difference especially for Canadian investors.
2. Under regulations there are distinct definitions between what a company can legally call "proved" and "probable" reserves. Many unit trusts replace their production as they move reserves from the "probable" category to the "proved" depending on the detail of geology studied. One unit trust has increased it's "proved" reserves from 7 years to 11 years without any new acquistions. There are even further possible reserves in prospective lands yet to be analyzed.
3. Unit trusts in Canada are much smaller than the integrateds. Unit Trusts are not "dying" as they are now buying lesser producing fields that are not feasible for larger companies to exploit. Vermillion has done this twice over the past year purchasing fields from Esso and BP and got a 20% higher yield from those fields.
There are lots of uncertainties ahead (both political and economic). Five years from now (and if you do not have a medium term or longer focus, why on earth would you buy these things?) both context and structure may change considerably both politically and economically.
What I did was sell half of my trusts at a moment when these had declined much less than XEG (TSX), a Canadian index, and put the money into XEG.
Given the current strength of the U.S. dollar against the Canadian dollar, XEG might be worth a look for those with a medium term focus.
I think Enerplus just did this. In the past month or so, they used a $500 million asset sale to pay down debt, and then cut the dividend to free up cash for asset purchases next year.
I think that the arguments are basically correct and none of those who disagreed in the comments actually refuted any of the substantive points.
I think that the summary is that the Canroys are not good businesses the way most are run, and now that they are losing their tax advantages, they are left with their flawed business models, or flawed implementations of their good models.
I was also surprised - since you seemed to be in favor of Canroys converting to MLPs - that you did not recommend good MLPs for those who are interested in yield in O&G businesses. The good upstream MLPs, like LINE and EVEP, are great values now and their numbers are better than the Canroy numbers every were. LINE is 100% hedged until the end of 2011 and has around 20 years of reserves. It does not need to raise capital in the near future. Its distributions are tax advantaged for US investors, though not so for Canadians.
A trust is simply a way to pay cash out to unitholders, and on the conversion back to corporations, you will likely see the majority of these companies in their identical form operationally. The unit price will just have to change to reflect a smaller payout.
I did not mention MLP's because the article was on the Canroys only.
Yes, E&P's are having their difficulties as well. A prime example is Oilexco. They nedd 100 million dollars and will be pumping 50,000 barrels a day by 2012.
My point is these 5 Canroys have 100 million and then some. If they convert in 2011 why wait?
ERP's asset sale was brilliant in timming, true. But a one time event. The cash flow will be a constant stream while it may fluctuate. That's the source of any true strength with these Canroys.
To our Canadian friend, yes a portion is at times returned as capital. But as you pointed out this effects Canadians. The article was soley based for US investors. And they are getting a raw deal that may become rawer.
The step out and infill drilling does indeed raise proved reserves. But it does not mean it will raise production.
But as we have seen the raising of reserves to a proven category does not always equate with a 1 to 1 reserve replacement.
I believe the Harper regime will oppose any MLP structure domiciled in the US that has Canadian assets backing it up.
Also, MLP's carry with it an inherent risk that the General Managing Partner gets too big of a cut and can sell assets out from under the common unit holder.
I have no puts or short positions in any of these Trusts nor have I ever. Why bother they have already been clobbered. The only conspiracy here is between Flaherty and "Honest" Ed.
The enviro nuts can indeed alter new oil sands production but existing production will carry on and assume the burden as a cost of doing business
On the TLM score, yes a recommendation from me at 15 and change where it went to 22 and change. Now, I and everbody else is under water. We all should have recognized that this was only a "trader",like all the others.
Finally, I'm long Canadian Oil Sands Trust and Crescent Point Energy Trust and I wish they would slash the dividend as well. While CPG has substantially raised production over the last 3 years and stuck a bundle into new drilling it still goes through more cash flow that is internally generated. COS is probably the only trust that can pay out the high cash flow and not worry about exploring for new oil.
I don't think there is any help for me on the typing.
Finally, I enjoy these rows because it is only Canroys and MLP's the can gin them up. Everything else these days is so blase.
What I didn't here from anybody yet, is an investor doubling or tripling down on these vehicles believing in a comeback.
I rest my case and gentlemen, good hunting.
On Nov 24 08:55 AM yank wrote:
> Author raises some good points. However, I don't think any of us
> CANROY investors ever thought of them as E&P companies. What
> continues to amaze me is the shortsighted (idiotic) strategy of the
> Canadian and Alberta provincial Govt. By destroying the CANROY business
> model you achieve the following:
>
> 1. Less (not more) oil and nat gas production.
> 2. Less (not more) tax revenue.
> 3. More (not less) opportunity for Foreign investors to swoop in
> and buy up cheap assets.
> 4. Increase the likelihood of these trusts becoming more like an
> ECA, or IMO whose effective tax rate is 10%. Is that what Ottawa
> really wants out of their strategy? Talk about the "Law of Unintended
> Consequences."
>
> Finally, Let's just set the record straight on why there was a Halloween
> Massacre to start with. Flaherty and his cronies basically caved
> into the pressures of "Big Insurance" (can you say Manulife?) who
> despised the thought of Candian investors avoiding their crappy and
> expensive retirement products in favor of a self-directed low cost/high
> return investment like the CANROYs. Never did Flaherty and his crooks
> expect the firestorm they got from private investors. In 2011 we
> will see a massive move to MLP structures (USA) or a conversion to
> an Encana-like corporate status. Trusts with the most tax pools like
> PWE and ERF will fare the best. Who knows what will happen to the
> rest. Meanwhile the trusts have basically given Alberta the " middle
> finger" salute. I sat in on a recent ERF investor presentation. Most
> if not all of their 2009 and 2010 CAPEX will be focused on Saskatchewan
> and BC, not Alberta. It's going to be a long, hard cold winter for
> those greedy Alberta politicians. Freeze, baby freeze.
Our Canadian friend Webby said something important about foreign ownership. Non-Canadians cannot own a majority percentage of these trusts. Coutu of Syncrude fought to increase that foreign ownership percentage several years back. Coutu was partially successful.
Coutu is a true internationalist in that in his eyes all investors are "created equal".
The Canroys came to the US in dire need of equity capital. They couldn't get it in Canada for the price and the amount they wanted. That's why they put up with the paper work of dual international listings.
So we bought in.
Canada is a soverign country that has an inalienable right to change the rules and derive the benefits and the consequences of the action.
But what they don't have a right to do is to take our money and then put us on an inferior footing with a Canadian investor.
President Elect Obama has stated that part of his mission is to smooth out un fairness in free trade. He can start here with the little guy who put his money on the table and then had the table rigged.
Obama can tell Mr. Harper that we in the US have no problem with Canadian Soverignty but if you come here looking for money we want equal treatment.
The same benefit a Canadian receives holding these units in an approved pension or retirement account.
President Obama then should say to Mr. Harper that many middle class Americans placed trust in their Canadian investments and that trust is in trouble. That many Americans who bought these units need the extra income to pay everday bills and food on the table.
President Obama should futher say to Mr. Harper that while the price of commodities will fluctuate and company fortunes can wane, if you ask for our money do not make us second class investors. Which Harper has done.
This is one area where President Elect Obama can do something for the little guy and free trade.
P.S.
I contacted PWE. Here's the substance of my communication so far:
Dear Sir,
"The analysis below is by a former Amoco employee named Steven Ward and can be found from the website Seeking Alpha and concerns your operation and its viability going forward. As an American investor, I would appreciate your response to the suggestions contained in the article."
"Thank you for your email. The website Seeking Alpha is, in our opinion,
an internet blog and as such one upon which we will not offer comment.
We do offer comment on any of the research reports and notes issued by any of the research analysts who cover Penn West both in the US and in Canada. You can find a full list of the analysts on our website at
pennwest.com."
If you would like to discuss this further, please feel free to contact
me directly by phone.
Sincerely,
McKenzie Large
Investor Relations Representative
Penn West Energy
Dear Mr. Large,
I don't see why the fact that the source of the opinion is a blog should matter. The views of anyone, regardless of their source, must be judged on their merits. If we have learned anything over the last while, it is that appeals to authority, in this case, research analysts, are no more to be trusted than any other source.
STAY TUNED!
Mr Ward's article has caused me to write one of the very few responses I have ever and am ever likely to write, which I do because in these fearful times someone needs to provide a little solace to the tortured investor who has had the backbone to stand behind companies like PWE when all others lost their heads and fled.
Before I drag you all through the text of my response, as I have done my homework, I want to save a few of you the tedium of having to read this.
I am sorry to report that much of Mr Ward's article, which reading between the lines was aimed at PWE among others (PWE was specifically called out after all and is the biggest Canroy), is full of misconceptions, mistakes and although aspires to inform merely adds to the dis- and misinformation that abounds on the 'net.
Let me take a few of the points raised, one by one:
1. Mr Ward seems to have missed the point that unlike other trusts south of the border, the Canroys are not closed end funds, and are able to issue new equity. This affords the management of the companies an easy way of increasing both equity and value - viz. growth.
2. In the case of PWE, with its history prior to becoming a trust comprising over 15 years of E&P, it simply is nonsense to suggest that the management does not have the mentality or understanding of a real "E&P" business.
3. In the case of reinvestment I would refer all prospective investors in PWE to look at their website and examine slide 13 of their latest investor deck. PWE investors over twice the proportion of cash flow into E&P than Exxon, and more than Chevron and close to the proportion of Conoco. Does this echo the sentiments of Mr Ward? Perhaps PWE should become a real "E&P" like Exxon and spend a large chunk of its cash flow repurchasing its shares to enrich its senior executive's options packages? PWE spends over 20% of its cap on E&P annually.
4. The fact that Canroys like PWE can reinvest such a large proportion of its cash flow in E&P while paying out handsome dividends to unit holders such be a reason to stand up and take notice, as Ward accentuates.
5. PWE has a lot of Blue Sky. Of its 8.5M acres, around 50% remain UNEXPLORED. Of the explored and developed lands they possess, they continue to make rich new strikes at different depths yields new BOE from what were considered low value opportunities previously. Add their E&P experience and track record, then this investor expects a lot of Blue Sky going forward. Say another decade of rich pickings.
6. Ward suggests perhaps that Canroys should "blow down" by 2011. This would seem to indicate a lack of understanding of the basics of oil production. I can say that confidently as not so long ago I would have placed myself firmly in the same camp. It doesn't take that much effort to educate yourself. So I am a little shocked that a so-called analyst make such howlers. To anyone with an even the most modest comprehension of the oil production business this is a nonsensical statement. You cannot just suck out the oil within a little more than 2 years - at least not without leaving 30%-40% of the oil behind or more, which is a financial and practical non-starter.
7. The statements Ward makes regarding tax rates post 2011 are not the expected case, but the worst case for any Canroy NOT employing tax pools. For the case of PWE, you can expect 2013 to be the first year of tax increasese.
8. The Markey legislation proposal indicated is another indicator of extremely sloppy "analysis" or journalism on the part of Ward. There is a tool called Google that helps many in their basic fact checking. Not only was this bill killed in 2007 before it was killed the Canroy related impacts were already recognized and circumscribed. PWE lobbied against it successfully. This is a complete red herring at best. At worst....I leave it to you and Google time.
9. Alberta tax hikes. Yes, it will go from 18% to 20% for Alberta production. Big deal. No! Not a big deal. For PWE at $50 BOE we are talking a hit on cash flow of around 1%. For $100 BOE (please let's have this problem) then maybe 4% to 5%. Ward completely misstates and misrepresents again. For PWE, the Alberta wells are low production and so not significant. For other Canroys, do your homework. I would be surprised if they have not already done the analysis.
10. Falling future production - replacing extracted barrels with at least the same number of new barrels year on year. PWE's main constraint here (with a slight production reduction year-on-year) is the quality and age of the pipeline taking and relaying its oil. They are gradually replacing this. By the way, this is a major issue for ALL N.A. producers. Yes, for all of the E&P players.
11. I cannot wait any longer. Ward seems to think that the E&P players are the one to follow - the leaders, the trail blazers, the lords. Think again. Earlier I showed you Exxon's reinvestment record - half that of PWE. Any followers of Buffet understand well what I am about to share. A company is a cash generating device. The ONLY long term value of a company is the sum of all of the dividends generated. Why is this forgotten? Well, I guess some people look at capital appreciation forgetting that the only true reason for capital to appreciate (ie share value to increase) is that the company either holds cash or has shown a way of being able in the future to generate and hold or distribute cash). For many companies we forget this because the shares keep going up (remember those days?!). Well, for oil companies few believe that the supply of oil is self renewing or inexhaustible. So after, let's ay 25 years, they will have next to no oil (or gas) left. What will the value of an Exxon be then? Where will all of the billions or trillions have gone? It will all be an illusion of value. All the money generated and consumed with nothing but holes in the ground filled with water or C02. Canroys such as PWE will have generated real return. The ultimate test for a company is its ability to both generate sustained dividends and grow. Whereas an Enron can con many a Wall St fool, cash flow and dividends are hard to fake because you can take them and spend them.
12. The arithmetic and analysis regarding PWE's costs of producing a BOE are both incorrect and structurally wrong. The FDA costs are always amortized over a long time period (e.g. the $27 to acquire the BOE will contribute to oil produced maybe as much as 10 years from now....at what price per BOE would you estimate? the operating costs are the hear and now, and relate to an FDA of perhaps a decade ago - a few dollars?). If times get really toug (which they might) and if oil drops a lot further and stays down (which I doubt given supply falling off a cliff in 2010 or earler - the current IEA depletion rate average WW is 9.1% check out IEA.org) then I am confident PWE management under the seasoned hand of Bill Andrew will be able to cut headcount, reduce CapEx, slash payroll, renegotiate oil service contracts to get product to the area of $10 - $12 per BOE all in.
13. Final point. The growth constrained by Safe Harbor. Again, Ward makes a basic error. For PWE this "constrains" them to add $15B of new acquisitions in the next 2 years (i.e. a lot more than doubling in size). Somehow I don't think that is a major constraint.
14. Transition post 2011/20013 to a corporation. This is my final point and the reason why I invest in PWE. I believe that we are entering a new era of expensive energy and that all energy companies will do very well. PWE however and others that follow their path have the unique opportunity to demonstrate both growth, generate high dividends that the other E&P cannot match and do it consistently and knock the ball out of the park. Why? Because they are frugal, based in politically safe regions, close to their biggest customer, do not pay unreal bonuses to greedy management, and are able to live the discipline of returning a large chunk of cash flow to shareholders. This is what companies used to do, and believe, it is what companies post this recession/depression will do again if they are to survive and prosper.
I hope this will allow a few CANROY investors to sleep more easily and for their valued employees to hold their heads high.
Yours sincerely,
A high-tech CEO and individual investor.
2.
Damian
On Nov 26 12:09 AM Damian Black wrote:
> First, let me declare that I am long PWE and that my understanding
> and admiration for that company has grown during the crisis. I also
> would like to declare that I am a fairly meticulous person and like
> to understand in detail both the industries and the individual companies
> in which I invest.
>
> Mr Ward's article has caused me to write one of the very few responses
> I have ever and am ever likely to write, which I do because in these
> fearful times someone needs to provide a little solace to the tortured
> investor who has had the backbone to stand behind companies like
> PWE when all others lost their heads and fled.
>
> Before I drag you all through the text of my response, as I have
> done my homework, I want to save a few of you the tedium of having
> to read this.
>
> I am sorry to report that much of Mr Ward's article, which reading
> between the lines was aimed at PWE among others (PWE was specifically
> called out after all and is the biggest Canroy), is full of misconceptions,
> mistakes and although aspires to inform merely adds to the dis- and
> misinformation that abounds on the 'net.
>
> Let me take a few of the points raised, one by one:
>
> 1. Mr Ward seems to have missed the point that unlike other trusts
> south of the border, the Canroys are not closed end funds, and are
> able to issue new equity. This affords the management of the companies
> an easy way of increasing both equity and value - viz. growth.<br/>
>
> 2. In the case of PWE, with its history prior to becoming a trust
> comprising over 15 years of E&P, it simply is nonsense to suggest
> that the management does not have the mentality or understanding
> of a real "E&P" business.
>
> 3. In the case of reinvestment I would refer all prospective investors
> in PWE to look at their website and examine slide 13 of their latest
> investor deck. PWE investors over twice the proportion of cash flow
> into E&P than Exxon, and more than Chevron and close to the proportion
> of Conoco. Does this echo the sentiments of Mr Ward? Perhaps PWE
> should become a real "E&P" like Exxon and spend a large chunk
> of its cash flow repurchasing its shares to enrich its senior executive's
> options packages? PWE spends over 20% of its cap on E&P annually.
>
>
> 4. The fact that Canroys like PWE can reinvest such a large proportion
> of its cash flow in E&P while paying out handsome dividends to
> unit holders such be a reason to stand up and take notice, as Ward
> accentuates.
>
> 5. PWE has a lot of Blue Sky. Of its 8.5M acres, around 50% remain
> UNEXPLORED. Of the explored and developed lands they possess, they
> continue to make rich new strikes at different depths yields new
> BOE from what were considered low value opportunities previously.
> Add their E&P experience and track record, then this investor
> expects a lot of Blue Sky going forward. Say another decade of rich
> pickings.
>
> 6. Ward suggests perhaps that Canroys should "blow down" by 2011.
> This would seem to indicate a lack of understanding of the basics
> of oil production. I can say that confidently as not so long ago
> I would have placed myself firmly in the same camp. It doesn't take
> that much effort to educate yourself. So I am a little shocked that
> a so-called analyst make such howlers. To anyone with an even the
> most modest comprehension of the oil production business this is
> a nonsensical statement. You cannot just suck out the oil within
> a little more than 2 years - at least not without leaving 30%-40%
> of the oil behind or more, which is a financial and practical non-starter.
>
>
> 7. The statements Ward makes regarding tax rates post 2011 are not
> the expected case, but the worst case for any Canroy NOT employing
> tax pools. For the case of PWE, you can expect 2013 to be the first
> year of tax increasese.
>
> 8. The Markey legislation proposal indicated is another indicator
> of extremely sloppy "analysis" or journalism on the part of Ward.
> There is a tool called Google that helps many in their basic fact
> checking. Not only was this bill killed in 2007 before it was killed
> the Canroy related impacts were already recognized and circumscribed.
> PWE lobbied against it successfully. This is a complete red herring
> at best. At worst....I leave it to you and Google time.
>
> 9. Alberta tax hikes. Yes, it will go from 18% to 20% for Alberta
> production. Big deal. No! Not a big deal. For PWE at $50 BOE
> we are talking a hit on cash flow of around 1%. For $100 BOE (please
> let's have this problem) then maybe 4% to 5%. Ward completely misstates
> and misrepresents again. For PWE, the Alberta wells are low production
> and so not significant. For other Canroys, do your homework. I would
> be surprised if they have not already done the analysis.
>
> 10. Falling future production - replacing extracted barrels with
> at least the same number of new barrels year on year. PWE's main
> constraint here (with a slight production reduction year-on-year)
> is the quality and age of the pipeline taking and relaying its oil.
> They are gradually replacing this. By the way, this is a major issue
> for ALL N.A. producers. Yes, for all of the E&P players.
>
> 11. I cannot wait any longer. Ward seems to think that the E&P
> players are the one to follow - the leaders, the trail blazers, the
> lords. Think again. Earlier I showed you Exxon's reinvestment record
> - half that of PWE. Any followers of Buffet understand well what
> I am about to share. A company is a cash generating device. The
> ONLY long term value of a company is the sum of all of the dividends
> generated. Why is this forgotten? Well, I guess some people look
> at capital appreciation forgetting that the only true reason for
> capital to appreciate (ie share value to increase) is that the company
> either holds cash or has shown a way of being able in the future
> to generate and hold or distribute cash). For many companies we
> forget this because the shares keep going up (remember those days?!).
> Well, for oil companies few believe that the supply of oil is self
> renewing or inexhaustible. So after, let's ay 25 years, they will
> have next to no oil (or gas) left. What will the value of an Exxon
> be then? Where will all of the billions or trillions have gone?
> It will all be an illusion of value. All the money generated and
> consumed with nothing but holes in the ground filled with water or
> C02. Canroys such as PWE will have generated real return. The ultimate
> test for a company is its ability to both generate sustained dividends
> and grow. Whereas an Enron can con many a Wall St fool, cash flow
> and dividends are hard to fake because you can take them and spend
> them.
>
> 12. The arithmetic and analysis regarding PWE's costs of producing
> a BOE are both incorrect and structurally wrong. The FDA costs are
> always amortized over a long time period (e.g. the $27 to acquire
> the BOE will contribute to oil produced maybe as much as 10 years
> from now....at what price per BOE would you estimate? the operating
> costs are the hear and now, and relate to an FDA of perhaps a decade
> ago - a few dollars?). If times get really toug (which they might)
> and if oil drops a lot further and stays down (which I doubt given
> supply falling off a cliff in 2010 or earler - the current IEA depletion
> rate average WW is 9.1% check out IEA.org) then I am confident PWE
> management under the seasoned hand of Bill Andrew will be able to
> cut headcount, reduce CapEx, slash payroll, renegotiate oil service
> contracts to get product to the area of $10 - $12 per BOE all in.
>
>
> 13. Final point. The growth constrained by Safe Harbor. Again,
> Ward makes a basic error. For PWE this "constrains" them to add
> $15B of new acquisitions in the next 2 years (i.e. a lot more than
> doubling in size). Somehow I don't think that is a major constraint.
>
>
> 14. Transition post 2011/20013 to a corporation. This is my final
> point and the reason why I invest in PWE. I believe that we are
> entering a new era of expensive energy and that all energy companies
> will do very well. PWE however and others that follow their path
> have the unique opportunity to demonstrate both growth, generate
> high dividends that the other E&P cannot match and do it consistently
> and knock the ball out of the park. Why? Because they are frugal,
> based in politically safe regions, close to their biggest customer,
> do not pay unreal bonuses to greedy management, and are able to live
> the discipline of returning a large chunk of cash flow to shareholders.
> This is what companies used to do, and believe, it is what companies
> post this recession/depression will do again if they are to survive
> and prosper.
>
> I hope this will allow a few CANROY investors to sleep more easily
> and for their valued employees to hold their heads high.
>
> Yours sincerely,
> A high-tech CEO and individual investor.
>
> 2.
The last month or so has seen US investors buying power of foreign stocks increase some 25% on the strong dollar. And I have yet to hear any expert or pundit argue that the dollar will not weaken from here eventually, so it is likely a temporary bonus to buy stocks abroad. Further, as the USD likely weakens (as expected) it will be another bonus to be receiving foreign rather than USD dividends - the currency effect being enough to pay the tax in 2011 a well as make up for reduced distributions perhaps. Further, by buying closed-end funds selling at discounts, another bonus is achieved. 'Enervest' income trust (EIT.UN) is trading around 25% below NAV!
Is anybody knowledgeabe about this fund? It is around 45% oil and gas, and the balance in REIT's and business trusts. The fund uses some leverage on a 4% credit line, which seems pretty cheap. The current yield is completely ridiculous and the steady payout of the past will obviously have to come way down. Still, unless the CANROY's are going to really meltdown from here, it looks very compelling.
It trades on TSX as EIT.UN and in the US as EVDVF. Does anybody own it?
Usually though, one gets the gist of of what is being said.
If the CanRoys were a strictly dividend income play, I would have started diversifying out of some of them a long time ago. They are and will continue to be Oil/Gas companies with very attractive assets which will be utilized for many years into the future. Big oil has nothing compared to their potential.
I treat them as such, I am quite willing to wait for the next oil cycle to begin while holding assets which deliver extraordinary yields while I wait.
Now, most of the Stimulus employment orientated plans that I have read about are Infrastructure intensive. They are being proposed accross the globe. All of the currently beaten down commodities will again be in demand. Oil will play a major role. IMHO, I will not have to wait until 2011 before the CanRoys double from their current prices. Afterwards, I expect them to go up even more as Asset Plays.
What has been really interesting about all of the previous posts, has been all of the time spent bickering about who said what instead of staying on point.
Too bad, time could have been spent discussing whether any of the Trusts were Grandfathered and are exempt under the proposed law. Which trusts were more levered to oil vs NG. Which trusts had other operations, that sort of thing.
Natural Gas projects like Haynesville are being curtailed with the rest of the Oil complex. Bakken? too expensive with a current negative return. The small players who were the driving force behind these projects can't get the financing to continue expanding. The projected 2009 NG output? I don't know but I will make a Really Nasty comment here, there will be a shortage of NG by the end of next year.
The US imports NG from Canada via pipeline 24/7, we must be doing it because we are really stupid since there is a Large Surplus in this country.
Or maybe its the real nincompoops who do not realize that we are not self sufficient and have to keep importing it.
Overall a well-written article. If you follow any finance board, you will find die hard CANROY enthusiasts who bluster, rant and attack in spite of facts and trends, so the negative response to your article is predictable. Your patience in responding to comments is commendable -- it is always nice to try to engage in discussion and education, even with an unruly class.
This year a new asset class has been added to my list: MAV and MHI, federally tax exempt Municipal Bonds, with a monthly payout. A few months ago I added TNK which was reamed thereafter, I recently doubled down. It is quarterly but what the heck, my next quarterly will reduce my overall cost by 10%. I expect the next quarterly payout to drop by 2/3rds with a probable drop in stock valuation. I will double up again. Oil will continue to be transported into future and the distribution will increase again, I'm willing to wait.
On Nov 26 12:09 AM Damian Black wrote:
> First, let me declare that I am long PWE and that my understanding
> and admiration for that company has grown during the crisis. I also
> would like to declare that I am a fairly meticulous person and like
> to understand in detail both the industries and the individual companies
> in which I invest.
>
> Mr Ward's article has caused me to write one of the very few responses
> I have ever and am ever likely to write, which I do because in these
> fearful times someone needs to provide a little solace to the tortured
> investor who has had the backbone to stand behind companies like
> PWE when all others lost their heads and fled.
>
> Before I drag you all through the text of my response, as I have
> done my homework, I want to save a few of you the tedium of having
> to read this.
>
> I am sorry to report that much of Mr Ward's article, which reading
> between the lines was aimed at PWE among others (PWE was specifically
> called out after all and is the biggest Canroy), is full of misconceptions,
> mistakes and although aspires to inform merely adds to the dis- and
> misinformation that abounds on the 'net.
>
> Let me take a few of the points raised, one by one:
>
> 1. Mr Ward seems to have missed the point that unlike other trusts
> south of the border, the Canroys are not closed end funds, and are
> able to issue new equity. This affords the management of the companies
> an easy way of increasing both equity and value - viz. growth.<br/>
>
> 2. In the case of PWE, with its history prior to becoming a trust
> comprising over 15 years of E&P, it simply is nonsense to suggest
> that the management does not have the mentality or understanding
> of a real "E&P" business.
>
> 3. In the case of reinvestment I would refer all prospective investors
> in PWE to look at their website and examine slide 13 of their latest
> investor deck. PWE investors over twice the proportion of cash flow
> into E&P than Exxon, and more than Chevron and close to the proportion
> of Conoco. Does this echo the sentiments of Mr Ward? Perhaps PWE
> should become a real "E&P" like Exxon and spend a large chunk
> of its cash flow repurchasing its shares to enrich its senior executive's
> options packages? PWE spends over 20% of its cap on E&P annually.
>
>
> 4. The fact that Canroys like PWE can reinvest such a large proportion
> of its cash flow in E&P while paying out handsome dividends to
> unit holders such be a reason to stand up and take notice, as Ward
> accentuates.
>
> 5. PWE has a lot of Blue Sky. Of its 8.5M acres, around 50% remain
> UNEXPLORED. Of the explored and developed lands they possess, they
> continue to make rich new strikes at different depths yields new
> BOE from what were considered low value opportunities previously.
> Add their E&P experience and track record, then this investor
> expects a lot of Blue Sky going forward. Say another decade of rich
> pickings.
>
> 6. Ward suggests perhaps that Canroys should "blow down" by 2011.
> This would seem to indicate a lack of understanding of the basics
> of oil production. I can say that confidently as not so long ago
> I would have placed myself firmly in the same camp. It doesn't take
> that much effort to educate yourself. So I am a little shocked that
> a so-called analyst make such howlers. To anyone with an even the
> most modest comprehension of the oil production business this is
> a nonsensical statement. You cannot just suck out the oil within
> a little more than 2 years - at least not without leaving 30%-40%
> of the oil behind or more, which is a financial and practical non-starter.
>
>
> 7. The statements Ward makes regarding tax rates post 2011 are not
> the expected case, but the worst case for any Canroy NOT employing
> tax pools. For the case of PWE, you can expect 2013 to be the first
> year of tax increasese.
>
> 8. The Markey legislation proposal indicated is another indicator
> of extremely sloppy "analysis" or journalism on the part of Ward.
> There is a tool called Google that helps many in their basic fact
> checking. Not only was this bill killed in 2007 before it was killed
> the Canroy related impacts were already recognized and circumscribed.
> PWE lobbied against it successfully. This is a complete red herring
> at best. At worst....I leave it to you and Google time.
>
> 9. Alberta tax hikes. Yes, it will go from 18% to 20% for Alberta
> production. Big deal. No! Not a big deal. For PWE at $50 BOE
> we are talking a hit on cash flow of around 1%. For $100 BOE (please
> let's have this problem) then maybe 4% to 5%. Ward completely misstates
> and misrepresents again. For PWE, the Alberta wells are low production
> and so not significant. For other Canroys, do your homework. I would
> be surprised if they have not already done the analysis.
>
> 10. Falling future production - replacing extracted barrels with
> at least the same number of new barrels year on year. PWE's main
> constraint here (with a slight production reduction year-on-year)
> is the quality and age of the pipeline taking and relaying its oil.
> They are gradually replacing this. By the way, this is a major issue
> for ALL N.A. producers. Yes, for all of the E&P players.
>
> 11. I cannot wait any longer. Ward seems to think that the E&P
> players are the one to follow - the leaders, the trail blazers, the
> lords. Think again. Earlier I showed you Exxon's reinvestment record
> - half that of PWE. Any followers of Buffet understand well what
> I am about to share. A company is a cash generating device. The
> ONLY long term value of a company is the sum of all of the dividends
> generated. Why is this forgotten? Well, I guess some people look
> at capital appreciation forgetting that the only true reason for
> capital to appreciate (ie share value to increase) is that the company
> either holds cash or has shown a way of being able in the future
> to generate and hold or distribute cash). For many companies we
> forget this because the shares keep going up (remember those days?!).
> Well, for oil companies few believe that the supply of oil is self
> renewing or inexhaustible. So after, let's ay 25 years, they will
> have next to no oil (or gas) left. What will the value of an Exxon
> be then? Where will all of the billions or trillions have gone?
> It will all be an illusion of value. All the money generated and
> consumed with nothing but holes in the ground filled with water or
> C02. Canroys such as PWE will have generated real return. The ultimate
> test for a company is its ability to both generate sustained dividends
> and grow. Whereas an Enron can con many a Wall St fool, cash flow
> and dividends are hard to fake because you can take them and spend
> them.
>
> 12. The arithmetic and analysis regarding PWE's costs of producing
> a BOE are both incorrect and structurally wrong. The FDA costs are
> always amortized over a long time period (e.g. the $27 to acquire
> the BOE will contribute to oil produced maybe as much as 10 years
> from now....at what price per BOE would you estimate? the operating
> costs are the hear and now, and relate to an FDA of perhaps a decade
> ago - a few dollars?). If times get really toug (which they might)
> and if oil drops a lot further and stays down (which I doubt given
> supply falling off a cliff in 2010 or earler - the current IEA depletion
> rate average WW is 9.1% check out IEA.org) then I am confident PWE
> management under the seasoned hand of Bill Andrew will be able to
> cut headcount, reduce CapEx, slash payroll, renegotiate oil service
> contracts to get product to the area of $10 - $12 per BOE all in.
>
>
> 13. Final point. The growth constrained by Safe Harbor. Again,
> Ward makes a basic error. For PWE this "constrains" them to add
> $15B of new acquisitions in the next 2 years (i.e. a lot more than
> doubling in size). Somehow I don't think that is a major constraint.
>
>
> 14. Transition post 2011/20013 to a corporation. This is my final
> point and the reason why I invest in PWE. I believe that we are
> entering a new era of expensive energy and that all energy companies
> will do very well. PWE however and others that follow their path
> have the unique opportunity to demonstrate both growth, generate
> high dividends that the other E&P cannot match and do it consistently
> and knock the ball out of the park. Why? Because they are frugal,
> based in politically safe regions, close to their biggest customer,
> do not pay unreal bonuses to greedy management, and are able to live
> the discipline of returning a large chunk of cash flow to shareholders.
> This is what companies used to do, and believe, it is what companies
> post this recession/depression will do again if they are to survive
> and prosper.
>
> I hope this will allow a few CANROY investors to sleep more easily
> and for their valued employees to hold their heads high.
>
> Yours sincerely,
> A high-tech CEO and individual investor.
>
> 2.
thanks
Govts. are always finding ways they think will increase tax dollars so they can keep there snouts in the trough , and Canada being a basically Socialist country ( I am Canaidian by birth and paid high taxes before i left years ago ) , they are worse than the US .
I will continue to own , and picked up more this year , for the foreseeable future . Oil and gas prices will not stay at these levels for too long , and the US will continue to buy more and more from Canada . It's close , stable , safe , and friendly . And if Trusts are taxed at regular company levels after 2011 , we will still receive a much better payout than the average Dow , S and P , or TSX company pays .
Just so you know, the idiot Premier who passed the royalty increase is now taking back some of that increase... Read here: www.oilweek.com/news.a...
"I also forgot to add the the tax statements for US investors are completely bogus. The taxes levied are on the corporate entity and impact all investors north and south of the border equally. This kind of mistake shows Ward to be clueless on even the most basic of issues - the tax one pays on the dividends received..." - Damien Black
On Nov 25 08:35 PM steve Ward wrote:
> Onre final thought then I'm out of this blog.
> Our Canadian friend Webby said something important about foreign
> ownership. Non-Canadians cannot own a majority percentage of these
> trusts. Coutu of Syncrude fought to increase that foreign ownership
> percentage several years back. Coutu was partially successful. <br/>
>
> Coutu is a true internationalist in that in his eyes all investors
> are "created equal".
>
> The Canroys came to the US in dire need of equity capital. They couldn't
> get it in Canada for the price and the amount they wanted. That's
> why they put up with the paper work of dual international listings.
>
> So we bought in.
> Canada is a soverign country that has an inalienable right to change
> the rules and derive the benefits and the consequences of the action.
>
> But what they don't have a right to do is to take our money and then
> put us on an inferior footing with a Canadian investor.
> President Elect Obama has stated that part of his mission is to smooth
> out un fairness in free trade. He can start here with the little
> guy who put his money on the table and then had the table rigged.
>
> Obama can tell Mr. Harper that we in the US have no problem with
> Canadian Soverignty but if you come here looking for money we want
> equal treatment.
> The same benefit a Canadian receives holding these units in an approved
> pension or retirement account.
> President Obama then should say to Mr. Harper that many middle class
> Americans placed trust in their Canadian investments and that trust
> is in trouble. That many Americans who bought these units need the
> extra income to pay everday bills and food on the table.
> President Obama should futher say to Mr. Harper that while the price
> of commodities will fluctuate and company fortunes can wane, if you
> ask for our money do not make us second class investors. Which Harper
> has done.
>
> This is one area where President Elect Obama can do something for
> the little guy and free trade.
As for provincial politics... Even "honest" Ed, as much of an idiot as he is, was a better choice than our alternatives on the provincial side - The provincial Liberals would have done more damage and raised rates higher than he did. That said, I wish we had a different conservative in office - Ed was third best, and only won nomination of his party because the top two runners were so close (and their supporters each wanted their own guy to win, not the other top runner) that they held a special vote in which conservative members vote for their favorite and also a second vote for who they consider 2nd best. Both of the top two guys got more "favorite" votes, but "honest" Ed got the most "second best" votes, which were added up to give him a victory... A really stupid way to elect a leader for a political party... But soon after his victory - he was pressured by "media' (which is liberal in Canada), which made it seem like the average Albertan wanted royalty rates increased (they didn't) when they asked a flawed and leading question, "Are you getting YOUR fair share of the Oil Royalties?" Of course people answered no. That's like asking, "Are you getting your fair share of corporate tax money?" Most Albertans were mad at the tax increase when it went through. The Liberal media, seeing that Ed is weak, went on to say he isn't a leader (they are right, he's not!) and said that he wouldn't stand up to big oil. Then the provincial liberal party started to say they would increase oil and gas royalties. So, weak Ed, had to say, "I'm a leader" (what true leader has to tell you they are a leader?) and promised he would stick up to big oil and raise the oil and gas rates. Thus, the liberal media and the liberal party virtually backed him into a corner. Why raise taxes now? Our province is 100% debt free and has surplusses as it is!!!! We don't need to incrase taxes, so why do so? It doesn't make any sense and is completely anti-Albertan and the result is that a lot of Albertans lost their jobs in the drilling sector. Forgive us, we live in a liberal country with liberal media and we've had a massive influx of liberals from other parts of the country that have come here for jobs and they now get to vote too. The newcomers don't realize that for decades, Alberta struggled with stupid economic policies from the Liberals controlling the country . The newcomers don't realize that we closed most of our hospitals and cutback almost every department there was in order to balance the budget and work our way to debt free status. The newcomers beleive the LIberal media, that Alberta got debt free purely because of oil - we didn't - we sacrificed for decades with less hospitals and other goverment programs that a province like Ontario and Quebec continued to spend on - even if they didn't have the money, while we CUT back to spend only what we could afford. We were fiscally prudent even in hard times. We worked our way out of the mess we were in - and then oil prices surged and only made things better for our province.
Most Eastern Canadians don't remember Trudeau or his energy policies that almost bankrupted Alberta. In fact, most liberals still love Trudeau.
At least "honest" Ed (the idiot that he is) has rolled back some of the royalty increases (about $1.8 billion worth), though much of the damage has already been done. Did you mention the partial rollback? I don't think your article did... www.oilweek.com/news.a... Too bad it's not a complete and permament rollback...
As for Harper - He is the best man we could choose. He is an Albertan. He knows oil. He has a Masters in Economics. None of us liked it when Flaherty killed the Income Trusts - well, except the Liberal media and those in the East who despise Alberta and big evil corporations that "don't" pay taxes (lie). Flaherty got rid of the Income Trust sector because ALL companies can be Income Trusts in Canada, not just Oil & Gas... And many companies were trying to become Income Trusts to avoid taxes and increase share prices. Flaherty's tax reasoning was flawed because those corporations would pay taxes, as would investors, it would just be delayed due to the portion of dividends that is considered return of capital - but you can only return so much capital before that runs out and it the entire portion of dividends becomes fully taxable - Plus any capital gains on the corporation are taxable. But anyways, LARGE corporations from every sector of the economy were threatening to become Income Trusts, like Bell Canada (BCE). Instead of having EVERY company under the Sun convert to an Income Trust, they decided to reduce Corporate Taxes and make the Corporation structure more competitive. Do I agree with it all? No. Was some of their information faulty? Yes. The media acted like the Income Trusts pay no taxes - which is absurd! Do I want the Corporation structure to be more competitive so every company under the Sun isn't forced to turn into a Income Trust? Yes.
"Canroys", an American term, can grow and acquire quite a bit under the new (and stupid) rules before converting to a Corporation. These are barely limitations, and most companies will not be restricted by it as they still have PLENTY of room to grow and acquire. The true tragedy is that the Income Truts are being abolished in the first place. How many Canadian retiree's could have lived off the dividends? With 10%-15% dividend rates and a sustainabable business model (which some are very sustainable), even a $200,000 portfolio of diversified Income Trusts could generate $30,000 a year - and $200,000 isn't very much money!
By the way, Oil and Gas Income Trusts do a lot of drilling!!! I've been to driling rigs at 3 in the morning. Do they acquire exploration companies? Absolutely. But they also drill on their own properties. I've also been to Fort McMurray (Oilsands territory) and had a tour of operations - it is quite remarkable. Income Trusts play an important part in Canada, and now that they are being tossed aside, I'm interested to see how the transistion to corporations will be. The ony good thing - if it actually happens - will be the lower Corporate tax rate for all Canadian Corporations... Unfortunately, I don't think the LIberals, once in power, will honor the corporate tax decreases.
On Nov 24 09:09 PM steve Ward wrote:
> To Thor: I'm not bearish on the Canadian Trusts if they change their
> model, unless they already have a DDA of greater than one. Or can
> achieve that figure in 12 months or less.
>
> To Xiang2chu and searcher:: Canroys cannot make the large acquisitions
> due to Safe Harbor Rules. They have to become corporations. Frankly,did
> youn read the article? It clearly states that assets are becomming
> cheaper but Canroys are limited in buying them. And PGH and PWE did
> not share your concerns of high priced asset purchases when they
> bought several billion dollars worth of high priced assets from Chevron
> and Canetic respectively in the last 15 months..
>
> To Harley the Brave: I have a direct ancestor that fought on the
> winning side in 1776. Entire family has a phobia about the word Royal
>
>
> To paultaut: I have enjoyed your bullying over the last few months,
> now it is my turn: Youn are a partial idiot. I won't call you a complete
> idiot because it appears you know how to type. The Canadians already
> had their election on October 14th and they re-elected Harper. The
> anger of Canadian investors--where. Show me the grass roots ground
> swell that will roar the Canroys back. Also, I am pleased to hear
> that currency rates and swaps will soon stop the bleeding of production
> in the 5 Canroys I mentioned.
>
> ToThor_9128, your argument is not with me on the numbers but rather
> with CIBC World markets and other Canadian houses that publish the
> data. Also, I've owned BPT for my account and for my moms.
> I am saying this gently, unlike to paultaut. BPT is a blow down model
> and it is 100 percent oil and NG liquids. There is now gas portion
> to stink up payouts on wild fluxes. Also, it does not have debt and
> it it is guaranteed a percentage of the "First" 90,000 barrels pumped
> which generates approximately 14,500 barrels a day for BPT. So, it
> does not matter one whit to BPT that Prudhoe production has slid
> dramatically. It will never matter as long as 90,000 BOED are pumped.
> BPT Royalty holders will always receive their full and not a partial
> share. Thank you for bringing up BPT, it dramatically shows the benefit
> of a blow down or pure royalty trust without hedging and outrageous
> costs in management. BPT proves my point.
>
> To: paultaut: stimulus will be pushing on a string. Stimulus won't
> kick but hyper inflation will. Like I said, you have a wait of until
> the last quarter of 2010. Most of these trusts are gassy. US has
> a lot of gas comming on stream in 2009 and 2010. Good luck.
>
> To: yank: you have valid points. Ottawa wanted the wealth spread
> out to the other provinces. Kill the Trust structure first than have
> your buddy "Honest" Ed Stelmach whack conventional production to
> push it even further out. Stelmach gambled on unconventional oil
> and gas production that is why the Alberta hike favors un conventional
> producers like Ember and the deal Marcel Coutu got from Alberta this
> last two weeks. It was a sweetheart.
> The whole thing was planned. It was planned, it was planned and it
> was planned. It was a conspiracy. Just look back and see how all
> the pieces fit together so well. This was not happen stance, it was
> deliberate. And so far it has worked to perfection with Harper winning
> re-election one month ago and Honest Ed getting re- elected earlier.
>
>
> China will not take over Canadian assets in Canada unless the Harper
> government invites them in. Harper has hung out a "Chinese Not Welcomed"
> sign. The Chinese have been burned with the Northern Lights ptroject
> and find doing business with Chavez and African dictators more rewarding.
>
>
> Also, many investors I have spoken to have used the words E&P
> in describing the Canroys. That is the only reason I mentioned it.
> But these investotrs, mostly novices, are not idiots. The Canroys
> constantly use the word, "sustainability&am... in their presentations
> so an investor would logically assume an E&P type company.
Munny is correct and I stated in the article tax pools help only the Trust avoid Federal taxation. US investors will get an additional with holding after 2011.
How anyone could figure out that President Elect O'Bama is my buddy I have no idea.
My attitude is put him to work.
On the drilling: in the past as I stated in the article it is stepout and infill drilling. For the past 6 years PWE has trotted out the fact that they have 4 million acres of un-explored lands. I hope for the shareholders that they find significant quantities. PWE holders should keep us posted on these developments.
But what is significant is that some Canroys are going for pure exploration such as ARC and AAV in the Montney.
On Canadian politics, yes the Liberals are a disaster. And Harper wasn't much better with these results.
What I've heard so far is defense of yield chasing. What I haven't heard is someone doubling down on existing positions at these levels.
(EIT.UN, or EVDVF in the US)
It's supposed to be the largest diversified income fund in Canada. It's also about 45% energy with the balance in REIT's and business trusts; transitioning to some equities due to the tax changes.
It's exchange-traded, at a whopping 25% discount to NAVs right now, and worth a serious look!