The proposed $5 billion acquisition of PrimeWest Energy Trust (PWI) by Abu Dhabi National Energy Company [TAQA], announced September 24, may have positive implications for energy prices at the same time it further exposes the fallacy of Flaherty’s Folly that seeks to eliminate publicly traded royalty trusts in Canada.
On the positive side, there appears to be an “insider” angle in the transaction as the Middle East buyers may have less confidence in the capacity and security of Middle East oil as a moderating oil price factor. The deal price paid appears high, low or about right depending on the context.
The selling unit-holders will receive 26.5% more than recent stock price. But recent stock price has been beaten down from its level before the Halloween 2006 betrayal by the current Conservative Federal Government. On a McDep Ratio basis, the deal price may be a modest premium to the present value we would estimate, though we have not made that calculation for PWI since it was last in our research coverage in 2004.
Meanwhile, as the takeover highlights underlying value, our buy-rated and unrated oil and gas income stocks have an expected median distribution yield of 9.8% for the next twelve months.
New Buyer of Canadian Assets
On a buying spree in Canada, TAQA is acquiring at the same time $2.5 billion of oil and gas assets from Pogo Producing (PPP) and Pioneer Resources (PXD). Headed by Chief Executive Peter Barker-Homek, who worked at BP plc (BP) and studied at Brooklyn’s Polytechnic University, management has global oil company experience.
Capital seems plentiful in TAQA’s home country, where the Abu Dhabi Investment Authority is the world’s largest sovereign wealth fund with assets of $875 billion according to the Financial Times. Normally one would think that the government and citizens of one of the world’s largest oil exporters would want to diversify away from oil. Moreover, oil and gas in Canada has been a higher cost resource than oil in the Middle East traditionally. The contrary action implies conviction that Canadian oil and gas may increase in value while supplies of cheap oil in the Middle East may be more limited and possibly less secure than previously thought.
Political Irony in Tax “Fairness”
Investors know to run the other way when political leaders talk about the “fairness” of proposed changes. Canada’s minority government ended the royalty trust tax advantage after 2011 to stem an imagined loss of revenue. Instead the measure discriminates against individual investors who want to exercise some control over their retirement in favor of institutional investors who can use opaque techniques to avoid taxes.
In the current takeover, we understand from the Financial Post that the buyer may set up the purchase as a 100% loan and then make distributions as interest. Apparently, interest payments
would not be subject to corporate tax or to withholding tax on payments to non-Canadian entities.
Originally published on September 28, 2007.