Upstream MLPs and Canadian Royalty Trusts: High Return, High Risk?

In a previous article (Outrageous Opportunities in Upstream MLPs), I discussed high-yield opportunities in upstream MLPs, comparing them to Canadian Royalty Trusts (Canroys). Even after recovering from recent lows, both sectors feature tantalizingly high distributions:

Master Limited Partnership

• Breitburn Energy Partners (BBEP) - 8.7%
• Constellation Energy Partners (CEP) - 13%
• Enervest Energy Partners (EVEP) - 8.6%
• Linn Energy (LINE) - 11.2%

Canadian Royalty Trusts

• Enerplus Resources Fund (ERF) - 11.3%
• Harvest Energy Trust (HTE) - 16%
• Pennwest Energy Trust (PWE) - 13.5%
• Pengrowth (PGH) - 14.9%

If you believe at all in the Efficient Markets Hypothesis, you’ll want to know what risks induce the market to place such high yield premiums on these stocks. Here’s a look at a few of the key risks.

Taxation

MLPs and Canroys both have serious, but different tax risks. The market has undoubtedly discounted the Canadian 2011 trust tax changes and many Canroys have accumulated tax pools, which will delay the bite of the increased taxes for several years. But ultimately, the benefits of the current trust structure will be lost. Moreover, the risk of increased provincial levees and royalties still looms. Canadian national and provincial governments have shown a propensity to extract every cent they can from resource companies. Raising taxes on companies with substantial foreign ownership is a pretty easy political move.

Although MLPs pay mostly tax-deferred distributions, that satus could be lost. The IRS or FERC could change an individual company’s status or Congress could inadvertently destroy all MLPs while attempting to make private equity partners "pay their fair share." Pipeline MLP holders may recall how a 1995 FERC ruling temporarily reduced MLP prices by nearly 20% in a single day. Another risk stems from the unpredictability of MLP income passthroughs. For example, Teppco (TPP) passed through very little taxable income in 2006, but socked many unitholders with taxable ordinary income that exceeded the distributions paid in 2007.

Increasing Costs

Most Canroys hedge about half their production one or two years out; upstream MLPs tend to hedge 70% to 100% of their production as much as five years out. General inflation or a gold-rush environment in the oilfield is bad news for these companies, because it means higher labor, lease, and equipment costs that may not be completely offset by higher revenue. A glance at classified ads in Edmonton, AB or Pinedale, WY, suggests the gold rush is on right now. MLPs will suffer more from this because of their higher hedging percentages. At this point, a slump in oil and gas demand and a commensurate decline in oilfield costs might actually help them.

Distributable Cash Flow

Both Canroys and upstream MLPs rely heavily on financing to maintain and grow distributable cash flow. Current credit conditions and the cool reception to recent MLP equity offerings have constrained these companies. Acquisitions have ground to a halt and several Canroys have reduced distributions in order to maintain capital expenditures. The best bets in these sectors are the companies that show good potential for organic growth and whose distributable cash flow easily covers current distributions. Look out for companies that borrow to make distributions.

Exchange Rates

Exchange rates have a mixed effect on the various Canroys. Ceteris paribas, a stronger Loonie increases the U.S. Dollar value of their shares and distributions. However, because Canroy costs are Loonie denominated while their revenue is mostly U.S. dollar denominated, it squeezes their margins. A few Canroys, such as HTE, have hedged exchange rates to ameliorate this effect. To further complicate matters, many Canroys have U.S. dollar-denominated debt and interest payments. Pengrowth realized a $40 million exchange rate gain on their debt just in the third quarter of 2007. In short, some of these stocks will suffer from a stronger Loonie while some may actually benefit.

Lehman Brothers

Lehman Brothers owns substantial stakes in nearly every upstream MLP -- more than 10% in several cases. If circumstances force Lehman to dump those units, it might present great buying opportunities for holders with new money and a long term perspective, but really stressful times for current unitholders.

Should I Buy?

If you are comfortable with these risks and you think the market has fully discounted them, many of these companies present compelling values. They can help diversify a portfolio nicely since their correlation to the overall equities market is fairly low.

For my own portfolio, I hold Baytex Energy Trust (BTE) and Enerplus Resources Fund (ERF) but favor the MLPs for new purchases. While I believe the market may have priced MLPs efficiently for institutions and short-term holders, it does not fully value their significant tax advantages to very long term holders. Moreover, each dollar invested in an MLP generally buys you more net proved reserves.

Before you buy, consult a knowledgeable tax advisor to gain a complete understanding of MLP tax implications. Expect that you’ll have to pay an advisor extra to prepare your taxes.

Disclosure: Author holds positions in the stocks mentioned

Comments

[zayt trader:]

Good insight about the risk of these companies. You're right. The market doesn't seem to understand or value MLPs.

Some other ones you should look at are ATN and QELP.

What are the distributable cash flow for these, BTW?

2008 Apr 27 09:51 AM

[NOWHEREMAN:]

Me...your argument was interesting only because it was flawed from the start...The yield is secondary, maybe even the last thing that should be looked at.

Currency risk.....who cares.....the major points should be the attributes of each company...what grade of oil do they produce, reserve life, acreage available for exploration, do they hold assets other than oil, etc.

They are oil companies which currently distribute large amounts of cash...in the future, that cash distribution may be curtailed...great...be... their earnings will increase accordingly and all will benefit from the appreciation of each share...

Oil will be lower 3 years from now, the 15% dividend rate will be abolished...give me a break...so what...

The active return will still be above anything else...short of maybe some really beaten down REITS that survive...I started buying CanRoys before the creation of the 15% rule....I will hold them until they are all bought for cash...

2008 Apr 27 11:25 AM

[User 171371:]

I presently own PVX (Provident Energy Trust) and BBEP (MLP) and have owned other Canroys the Last few years.I agree 100% that the Socialist Canadian Gov. may continue the assault on the trusts.But you state "could change" "may" regarding MPL's.BBEP hedging goes way down going forward and in my eyes is way under priced at $20.91 and a 8.2% divy,PVX owns 20% of BBEP.

2008 Apr 27 11:27 AM

[elliot_mllr:]

Bear in mind two cautionary points: MLPs cannot be owned in tax-deferred accounts but only in currently taxable accounts; and most MLPs (but not LLCs) have general partners which skim off Incentive Distribution Rights and reduce the share of the limited partners' cash flow.

2008 Apr 27 02:40 PM

[AJ30:]

There is no riskless investment. MLP's give current cash out, which reduces risk of original $. Taxes are more complex, but whatever you pay to Canada is deducted from what you owe Uncle Sam, and the "Socialist team" about to take over here. My tax adviser breezes through my returns with no additional cost. Show me a "bullet-proof" investment for the next two years with a good return, and I will gladly dump my Canpoys and MLPs.

2008 Apr 27 03:18 PM

[jahowle:]

It is my understanding that these can be held in tax-deferred accounts up to a limit. Check with your tax advisor. You can also avoid the issue by investing in a closed-end fund that owns these stocks. I like the midstream MLPs as the consistantcy of their dividends is less depedent on the price level of the commodity. Moving energy around the globe looks like a good business for many years to come.

2008 Apr 27 11:03 PM

[NOWHEREMAN:]

PVX....good buy...bought when it first listed after some fluctuation at $8.50 a share...has paid for itself...I particularly like their West/East pipeline and their facilities for GTL...This allows them to to charge for usage of same and access to both coasts...LNG you know.

2008 Apr 28 12:04 AM

[lefty:]

Agree with Paultaut. My PVX is paid for. My 10 yr. old pension now runs $500 per mo. negative. PVX dividend makes up for that after taxes. P.S. They are not the only holding we have.

2008 Apr 28 07:02 AM

[Loup-Garou:]

Canroys work for some of us. Cash is king. Always. My (late) mother used to point out there were far too many American corporations whose boards met once a year to do two things only: Raise the pay of the officers and insiders, and Increase their retirement benefits.
Instead of looting the companies for the management, the canroys give the owners a bit back.

2008 Apr 28 06:34 PM

[insane_equine:]

BTE & Pengrowth are 2 Canroys I hold in addition to several US pipelines. These are the 'widows & orphans' investments of today, as electric companies once were.
Not totally risk free, but close enough for me.

2008 Apr 28 10:48 PM

[Greg Pinelli:]

You most certainly don't need to consult a Tax Advisor..that's simply perfunctory butt protection the author's part..almost ANY of the latest tax programs..and certainly the more sophisticated ones (about $90) will figure out the taxes..the Canroys take the tax out at the time of distribution...you file to get it credited back towards US tax.
What you DO need to work at is Due Diligence..go on the websites and look at what the Trusts are revealing about resource structure..reserve life..etc...VERY helpful..
For my money you could not do better than one US..Linn Energy and one Canadian..PWE....

2008 Apr 28 11:38 PM

[ewr:]

This is a question rather than a comment. Does anyone have any thoughts on what will happen to the non REIT Income Trust Sector (e.g. the Income Trust Index as represented by CIT.UN ) as we approach 2011, the date when non REIT Income Trusts lose their current tax status ?

2008 Apr 29 02:17 AM

[deuxsous:]

In answer to Elliot Miller: My understranding is that a limited partnership which has no debt and which distributes 100% of its net income can be held in US IRA's and similar tax-deferred programs. One which fits this description is DMLP, Dorchester Minerals LP. It pays quarterly (not monthly) on a current 9.20% TTM basis.

www.mcdep.com/rtweek70...

"The main tax complication of DMLP is that taxable holders must report distributions as partnership income including the separate items furnished in what is known as a K-1 form. For new purchasers, most or all of income in the early years would be sheltered by cost depletion. For depletion purposes conservative reporting of reserves is an advantage because the implied higher depletion means earlier tax shelter.



"At the same time, DMLP deliberately shuns debt to be sure that it does not trigger unrelated business taxable income for tax-exempt or tax-deferred investors. In other words, the stock ought to be suitable for endowments, pension funds and IRAs. Such investors forego the cost depletion advantage, but get full advantage of the avoidance of taxation at the partnership level. Non-U.S. investors might face other considerations."

2008 Apr 29 04:00 PM

[sltd:]

We own shares of PGH PWE and HTE in our ROTH IRA's. My accountant told me we could not do anything about the taxes that are with held by the Canadian Gov. from monthly distributions, is this accurate? If anyone knows thank you in advance.

2008 Apr 29 06:53 PM

[Bhakta:]

I own PGH, PWE, HTE, PVX, AAV ERF and PMT.to, and am more than happy with steady monthly income and slow appreciation.

2008 Apr 29 09:18 PM

[OJO Zafado:]

To SLTD : Your situation is as you post. The tax credit is only good on taxes you had access to. There are some schemes that claim you can get the tax credit in tax sheltered accounts. In many years of trading Canroys I have not seen one that holds up. This tax is then lost. However for tax sheltered accounts and for income from them these Canroys still make sense. You can recoup your tax "losses" by trading partial positions of the units against the swings. A look at the 5 year charts shows the drop offs as being even steeper than the runups of this volatile asset class. In tax sheltered accounts there are no ST vs LT trading issues or capital gains taxes. If you are over 59 1/2 in most cases you can with draw the units from tax sheltered status and pay the income tax. If held in a ROTH you may be able to avoid that situation. This could be an efffective tax strategy if you have losses in the market in unsheltered holdings you can "effectively" write off against. The same as for margin account interest. If you can get some good capital gains generated in the early (or any)part of the calendar year you can write off your margin interest against the ST portion of those gains. As long as your margin interest is nominally the same or less than your ST capital gains then it even makes sense to buy these trusts on Margin. You effectively then convert ST Capital gains to a 15% tax qualified dividend. You also then get the foreign tax credit as well. There are some other Canroy and Canroy morphs that have tax advantages. This is due to the tax treaty with the US and how the distributions are classified or packaged. There are some "stapled UNit" trusts like Atlantic Power ATPWF, and Timber West TWTUF that payout a portion or all of their distributions in the form of bond interest. Bond interest is not subject then to the 15% with holding. This dramatically increases your effective yield. In the case of Canfor timber income trust CFPUF there has been no 15% withholding on my units held in tax sheltered accounts. The ATBUF which is 40% owned by BAM Brookfield Asset management is converting from a trust to a Reit. I am expecting it to return to the $14 level when that occurs. While the loss of compensation or credit for the foreign tax is regretable it does not materially affect the buy for yield and appreciation in share value that most tax sheltered investors find most effective to provide income while growing NAV once your account is under distributions. I have recently sold out my positions in FDG but may re-enter if it gets below $47. This seems dubious but I was buying it at +/- $20 not that long ago. I own AAV, BTE, PGH,PWE,PVX, HTE as well as the others previously mentioned. I recently took off half the position in BTE as the valuation seems to be getting in the nose bleed section. I expect to do some additional "Sell in May and go away", selling of partial positions in the next several weeks. There is a time to sow and a time to reap. The time to buy these (energy related trusts) in partial positions is from Thanksgiving to just prior the MLK W/E. A big hurricane season can leave you out of the money but does not happen that often. I rarely sell more than half an accumulatied position. After bottoming near $8.50 CFPUF has shown good strength since TIN was put on some recommended list. Since then many Wall Street analysts have been pumping the forestry stocks as one of the commodities sectors to have not yet participated. Lumber futures have made a Quad bottom in the last year. I believe this is a trust with one of the greatest valuations. Checking the charts of FDG and GACCF (CFX~on TSX)we see that Met coal was at one time and even recently a grossly undervalued asset. The TWTUF has also been making a decent move higher recently as well despite being put on the sell rating by a Neil George news letter. In the same vein, not a trust but a Canadian company in another commodity severely beaten down is Uranium One. SXRZF -or UUU ~tsx. It rebounded last month off the less than $4 valuation to a near term high of $5. it has now started to settle back a little as the whole commodities thing may have been a little over done in this leg. It is interesting perhaps to note that it does alot of volume for a small cap stock.

2008 Apr 30 03:27 AM

[OJO Zafado:]

Sorry for the typo, GACHF is the correct symbol for Grand Cache Coal.

2008 Apr 30 03:35 AM

[sltd:]

TO: OJO ZAFADO,

Wow, did you ever answer my question and then some. I'm glad that I made the inquiry when I did. Anyway I am not nearly as knowlegable as you are, I just know going into retirement we will need more return on investments than treasuries are offering.
Thank you again for an indept answer and the time you took to give it.

SLTD

2008 Apr 30 11:20 AM

[Ray Meadows:]

Canroys revenue is in US dollars and costs are in Canadian. Unless they have swapped US for Canadian equal to all future revenue, a weaker US dollar is unambiguously bad for them. Distributions and stock prices come from profits not the other way around.

2008 Apr 30 01:05 PM

[Income & Yield:]

Shows a basic lack of understanding of these vehicles. A number of years ago some of these were yielding 20% and no one would buy. Nice return from say 2001 for example. see incomeyield.com

2008 Apr 30 03:28 PM

[OJO Zafado:]

SLTD>JM Keynes once remarked, "When the situation changes, I change my mind. What do you do?" This is something to keep in mind when constructing a retirement portfolio. While a medium term bond ladder with some small 8-15 year barbelling is the most effective way to preserve your assets and protect against inflation, current medium term high investment grade bonds do not offer very atttractive yields for the amount of inflation risk that currently exists. Best not to go out more than 3 years and avoid the long barbell issues as well until rates rise to reflect the true inflation risk.. It may be helpful to supplement such an investment with some high grade subordinated debt. There are many fixed rate preferreds offerred by the nation's 4 largest banks and even some large foreign banks that look attractive. These investments are not all 15% tax qualified so that is a big consideration if holding them outside a tax sheltered account. I have supplemented these with Adjustable Rate preferreds like FNM-P,BAC-E and UBS-D. Some of the "better" grade fixed issues I have used are FBF-N(BAC),USB-E,C-F,H... Sachs),MSJ,to name a few. You can get an improvement in overall yield at valuations in most cases well below par. Looking for fixed rate preferreds with near term call dates has some advantage in that if called you will enjoy a nice capital gain. I have backed this with some leveraging in DXKSX. This is a 2 1/2 times ten year note SHORTING vehicle. The adjustables still kick out some amazing yields and are "effectively " inflation protected. The UBS-D is a monthly payer. The WIA is a very good closed end fund that sells at a decent discount as well with lots of very good quality inflation protected debt also with monthly distributions. I have done very well in some foreign bond mutual funds. The +30% ride in MERKX, PFBDX, and LSGLX may be over in the short term... Also for exposure to precious metals without being too leveraged is the very excellent PRPFX. Best to limit distributions to less than 4.5% and use excess income to invest in equities so as to have all nine morningstar boxes as well as some good foreign mutual funds. The one stop for BRIC is the very volatile EEB. A leveraged long term fund like RYTNX is a great LT way to play the S&P 500 but is of course very volatile as well. I use the FCVSX to hedge RYTNX. Selling converts on S&P weakness to invest in RYTNX and then conversely taking something off the Rytnx and putting it back into FCVSX in up markets. The ADVDX is another very good income producer with broad market participation. While having a high expense ratio the INCMX fund of income funds has also done pretty well in this credit issuance crushing market. In the current period it is indeed hard to find good safe income at a decent return. While most of the economic scenarios continue to look bleak globalizatrion has left the FED impotent to control real interest rates. $4 gasoline, road fuel and home heating oil are going to show up and very soon in the inflation risk premium for investors. Most people who never bought a house with an 11.25% mortgage can not believe how high rates can ultimately go. Some RJI,MOO and DBA may also be good ways to hunker down. The mutuals like UMESX,FLATX,FICDX,PSPF... and ICBMX are great ways to missle proof a portfolio!

2008 May 01 03:14 AM

[Mmarrkk:]

Zyfado: your thoughts on investing in Bond Funds with interest rates poised to rise?

2008 May 01 10:15 AM

[OJO Zafado:]

M mar k's It depends on your outlook on interest rates. I would continue to own the inflation protected such as FINPX and WIA. I would continue to own INCMX despite a pretty high expense ratio. While a fund of Short term bond funds it seems to have more safety than some of the floating rate bond funds and provides a superior yield. It also has some tax advantages. The PFIDIX and FFRHX may be OK but the quality of the debt is not that great. This may pose a danger in a recessionary environment. IMSIX is another of these. The convertible bond funds are probably the best bet in this kind of envirionment and economy. In addition to the FCVSX as in my previous post the NOIEX is also a very well run fund. Convertibles give you more protection in an envirionment of rising rates. If we assume the market forces are at work pushing cash over to equities from fixed income to take advantage of the stock markets' reviving, then interest rates would rise further. In this case the value of your bonds is curbed. With convertibles you are participating in the stock market appreciation while receiving a marginally higher coupon . Perhaps tax exempt munis might still be a value. I have owned PMX in the past. It is very good especially when it can be gotten at a discount to NAV. I have a position in FLTMX intermediate term. Generally sticking with the bigger outfits like Pimco will get you better management. I currently own no straight forward "Bond Funds". In an environment of rising interest rates if you own a bond mutual fund you are not going to neccessarily prosper. These are open end funds. As rates rise your initial principle investment erodes. This can be partially offset by reinvesting your interest. As rates continue to rise more money pours in from other and new investors to take advantage of the higher yield. This is particularly damaging to the existing share holders as the portfolios always have bonds acquired during your owner ship period below par. As these mature or worse are sold by the bond fund near maturity to buy higher yield new paper at or near par the new investors then participate in that portion of the "effective" yield that would have been yours. Conversely the bonds held with higher yields that were above par when you take your position lose value. Your portion of the effective yield to maturity is effected by the new investors now participating in that yield at the higher rate at a lower price. Bonds and bond funds also have the added disadvantage of not getting any favorable tax treatment in non-sheltered accounts. You are much better off just building your own bond ladder with individual issues. When there appears to be a period of unsustainable low interest rates as we currently seem to be in you would buy short term notes of less than 3 year maturity. As they mature you will participate in the whole portion of a 5% coupon on a bond you buy over par to maturity or call. You may only get 2.75% on bonds you buy below par but the effective yield to maturity again will be all yours. There is no dilution. As rates rise you can continue to go out further to 4-6 years to get better coupons. Generally at some point you take a long "barbell " of 12-15 year bonds of very high quality paper with rates that have a strong premium over the average rate of your ladder. For this envirionment there seems no compelling value in buying anything long. ST and ultrashort term funds are about as safe as you can get . I have recently taken a position in DXKSX and I have added to it every time there is a small rally in the Ten year note. !!!At this time standard bond funds especially with any kind of what may appear to be a "good" yield (longer average maturities)are very dangerous investments in my humble opinion, given the box the Fed has worked itself into!!!! What is wrong with the floating rate high quality preferred issues I have previously posted? Adjustable means that as rates rise the coupon rises as well. Aside from that the reason these are selling so very far below par means that the effective rate for a new purchaser is fabulous. Once the rates rise the price of these issuances will rise as well with their coupons towards par. There is a dearth of value in the bond market right now. I have had nearly 1/2 of my bond ladder positions for this calendar year mature. I have reinvested the entire proceeds in the investments as posted before. The average yield is well over 7% and while a majority of this paper may never be called, most all third party trust securities are called near their Call dates. The yield premium and QUALITY are just way too compelling, compared to bonds of the same ratings to not take advantage of this current market disruption. Of course I have a fully structured bond ladder with rungs full thru '11 to start with. Once rates rise to reflect inflation and true risk premiums I will go back to investing current maturities in the '12 -'15 bond issuances. I owned some RBS preferred that went 5 years past the call date before being called. The yield was just over 8% 15% tax qualified against my below par cost basis. I had a nice tidy tax advantaged LT capital gain as well.

2008 May 02 07:19 AM

[Mmarrkk:]

Thanks. Your logic seems very good. I have someone who has been recommending several bond funds...AWF, BNA, RCS, TEI, EFL. I just worry that they have had a run as interest rates have floated down and will suffer as they rise. Also have recommendations on quarterly interest bonds and quarterly income preferreds (QUIBs and QUIPs) allong with some other "hybrids" like OTT, ATPWF and others. Also, any interest in something like PJL (Verizon 7.625% 12/30 mini bonds?

I'll take a look at your previous post and this last one and pull together some ideas. Thanks for the input.

2008 May 02 09:41 AM

[Mmarrkk:]

Also, what are your thoughts on the ultrashort ETFs on Treasuries? PST and TBT. If one thinks Treasuries rates are due to rise, wouldn't the shorting strategy work? Maybe just as some insurance?

2008 May 02 10:04 AM

[OJO Zafado:]

As I posted above I like the short treasury position. I have used DXKSX to hedge my non-Adj preferred shares. While owning this 2&1/2 times short mutual fund involves one in trading restrictions, no short term trading allowed and positions purchased must be held for 6 months under the rules of my brokerage company. The 2 etf's are of course as good as they are of the same investment strategy. As I own RCS and the 2 foreign bond funds MERKX and PFBDX, I find the mutual fund a better vehicle for my averaging my DXKSX position. You would be right to be cautious of RCS. It's yield & quality are good but the premium to NAV is in the teens! With these mutual funds I am able to sell partial positions in the foreign bond funds where I have gottted +30% combined div and cap gain returns over the last 2 years & then put that into the inverse strategy DXKSX, with out paying commissions. Shorting the 10 year Treasury is going to be a long term trend/play. The current rate situation is just not sustainable given the Fed continuing to flood the WORLD with liquidity. Yes I think the PJL is very good. I own several Verizon conventional bonds in my bond ladder. I just added another position in MSJ for about the same yield. But you are going to be paying a premium for PJL as it sells above par. This issue is past it's call date. That supports the price if you are an owner of the shares but means that if it is called which is quite likely you will not recover your full cost basis. Your YTM will be less than the coupon. The MSJ is even a higher quality, has an early 2011 call date, yields 7.4% against it's price well below par of about $22.20. If called in 2/11 you will get a very large gain on your cost basis while enjoying the 7.4% HJJ ditto. FBF-PrN as well. While I am now gun shy of PYI you can see by the chart why it was a bargain down around $20. As I generally make my purchases in partial positions I missed out on getting more shares of PYI on board. This is why you are better getting these "third party trust certificates" below par. I have the EFL watch listed but own the GLQ. If I were to add to this emerging market thing I would prefer to own KMM for income and the EEB for appreciation. The Central banks of emerging market debt markets seem very willing to keep their interest rates higher and may just rise in lock step with US rates. This is a riskier investment as we must recall the huge default of Russia on it's massive debt some ten years ago. The GLQ holds larger positions in global O&G exploration and production as well as a big positionin Global Financials. I also own the DGT as a trade. I do not knoe OTT. I have seen the BNA and the AWF but do not recall what they are about. The INB intrigues me. Global real estate I believe. It has really come up off the mat and has a great yield.

2008 May 07 08:49 AM

[surfside sue:]

OJO Z... :

I've read your postings with great interest, but can't quite find the answer to my overriding question which is:

Can I hold Canroys or MLPs in my ROTH (tax free) account and get the benefit of high yields (minus 15% withheld on Canroys), or am I asking for trouble here? I don't use a tax advisor, just TURBOTAX.

Thanks Sue :-)

2008 May 16 12:43 PM

[123:]

Can someone explain why these companies (these oil-royalty trusts) are selling stock and debt to finance their dividends? Isn't this, in all likelihood, value destroying (instead of paying the dividends out of FCF)? (Because usually cost of capital for debt and equity are higher than for internally generated capital).

All of these trusts have been going up, but it seems to me that's because: people like big dividend yields + "oil is good; buy oil." But like I said the financing here makes no sense, at least to me...can someone, who wants to, explain what I'm missing? Additionally, on a FCF basis, also, most of these companies are in the red because their capex exceeds their operating cash flow, and probably will for the foreseeable future. These things are like some kind of twisted version of a "growth stock". After the above, seems like a bubble with these royalty trusts.

2008 May 18 01:17 AM

[patfish:]

new and ignorant to the canadian trusts...but i have a question...Are there options available on these vehicles? I was thinking that the risk of government increasing taxation could be mitigated by straddling with short call and long put equidistant from purchase price of underlying trust shares....so, is this possible? wouldn't i concievably lock in 15% returns without waiting for the other shoe to drop b/c of the long put position? This would allow me to purchase on margin with same startegy and increase return (net) to 30%-8%int=22% at VERY low risk...

2008 Jun 15 03:29 AM

[Jabes:]

Yes, the only thing to think about is, I think, you cannot at this time file for the return of the Foreign tax at the end of the year as you could if you had them in a taxable account. This is how I understand it -- I wonder if anyone can make this any clearer or correct me if I am wrong. I own in both IRAs and taxable accounts. I think the returns are worth the 15% I have to give up on the ones in the IRAs.


On May 16 12:43 PM surfside sue wrote:

> OJO Z... :
>
> I've read your postings with great interest, but can't quite find
> the answer to my overriding question which is:
>
> Can I hold Canroys or MLPs in my ROTH (tax free) account and get
> the benefit of high yields (minus 15% withheld on Canroys), or am
> I asking for trouble here? I don't use a tax advisor, just TURBOTAX.

>
>
> Thanks Sue :-)

2008 Jun 21 02:25 PM

[ewr:]

I have been interested in the surroundings to this question for a long time, i.e since Steven Harper and his Conservative government legislated the end of the favorable tax regime for income trusts ( except REITS,) whenever it was, perhaps about 2 years ago.

I think that the businesses that comprise the non REIT income trust sector will convert to ordinary corporate status. They probably have no other choice and this is already happening. We then will have to examine the desirability of owning these businesses as individual companies. Although the tax hit will probably be only about 35%, I personally will not find investing in any of the stocks that previously comprised some sector income trust, as a good idea. There are and will be much more sound investments available.

My own idea is as follows: recognising the demise of the benefits of investing in income trusts, most sensible investors are going to pull out. Where will all this money go ? I do believe that a large proportion of income trust investors were in it for the yield. The only remaining somewhat low risk, but high yield ( yes I know this is somewhat of a contradition) will be the REITs. This is the reason that I think that REITs are a good investment now; for the current yield, and for the inevitable capital gains as we aprroach 2011. These gains will come from the transer of money from the defunct income trusts to the REIT sector.

I would be very interested to read anyone's comments on the above.

On Apr 29 02:17 AM ewr wrote:

> This is a question rather than a comment. Does anyone have any thoughts
> on what will happen to the non REIT Income Trust Sector (e.g. the
> Income Trust Index as represented by CIT.UN ) as we approach 2011,
> the date when non REIT Income Trusts lose their current tax status
> ?

Jan 08 03:03 AM