We've all heard that royalty trusts are going to be pained when they are taxed like regular corporations in 2011, and Alberta’s proposed royalty changes really suck. However, this week, Canaccord Adams, long a noisy critic of anyone’s plans to tinker with trusts, released a report on the evolution of royalty trusts. It picked eight oil and gas trusts it believes “have the right assets and right people to successfully transition” into intermediate or senior explorers and producers.
Kyle Preston, Canaccord’s man behind the 103-page report, believes high dividends, balanced with a focus on growth, will be the hallmarks of the post-2011 era for energy trusts.
Investors will have to adopt to this new business model as while the energy trust sector as we know it disappears into the sunset.
Also making his list of favorites are: ARC Energy Trust, Crescent Point Energy Trust, Enerplus Resources Fund (ERF), Progress Energy Trust, and Vermilion Energy Trust (VET). For the record, ARC and Crescent aren’t quite as sexy as the rest, in Mr. Preston’s eyes. He calls them "holds," while the rest are tapped as "buys."
The organizations that will prosper the most in this new era are those that have scale (large land position), technical expertise and superior capital efficiency/discipline. As a function of the trust business model (acquire and exploit), many of the remaining, energy trusts have accumulated large land positions, developed in-house technical expertise and understand the importance of capital discipline.
This evolution of new technology is breathing new life into these mature assets, and by a matter of default, the trusts are well positioned to take advantage of this technological revolution.