Five Oil and Gas Trust Picks

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.

Top three, in no particular order: Baytex Energy Trust (BTE), Daylight Resources Trust , and NAL Oil & Gas Trust (NOIGF.PK).

 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. 

He wrote:

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."

He said:

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.

Comments

[Jack Yetiv:]

How does one get this report?

Can you shed any light on specific reasons why these trusts were picked as best-of-breed?

Jack

2008 Jun 05 09:30 AM

[yank:]

Canaccord Adams is one of the few analysts that have been "spot on" with their withering criticism of the incompetent Canadian Govt. In their energy trust study earlier this year they correctly stated that with the ill-conceived debacle of trust tax changes in 2011, tax revenues and oil/nat gas production will both DECLINE making it a lose/lose proposition for everyone. Once again, leave it to the politicians to screw up everything again. These guys could mess up a wet dream.

2008 Jun 05 10:01 AM

[Steven Ward:]

CA made alot of their money bringing E & P's to market with an extensive network of investors in Europe and Canada. The E & P's would then ratchet production up to 5,000 barrels aday and get bought out by the Canroys netting CA investors a nice bundle.

That all changed with the limiting of how much a Canroy can raise in capital for further growth through acquisition. A CA founder and VP was so disgusted with what had happened he quit the business altogether.
It now appears CA made the adjustment necessary to "stay in business", so to speak as the junior E & P market has dried up.

2008 Jun 05 11:22 AM

[Steven Ward:]

For the record: I like Daylight and Crescent Point. Vermillion may depend on what happens with their Libyan partially owned subsidiary. But it's worth a look along with Baytex. Sensible dividends along with "running room" and "assetsout of Alberta" maybe the common theme here.i

2008 Jun 05 11:25 AM

[oilsands:]

Godd comments. I echo Jack's questions. I am surprised that Penn West is not on the list. Also PVX and AAV COSWF.

2008 Jun 05 01:47 PM

[je:]

Why not HTE??

2008 Jun 05 09:30 PM

[resourceman:]

I used to own some NAL Oil & Gas Tr. but last time I checked their distributions are not considered as Qualified Dividends for tax purposes. My belief is that there are so many senior Canadians who rely on these CONRYS for their income that the 2011 tax increase will be forgotten , or there,ll be a revolt. Maybe they,ll have a new Gov,t by then, who knows !!

2008 Jun 05 10:34 PM

[REBEL:]

Here's a plug for a US energy trust that is paying me a shade ove 11%
and holds at least 20 years of reserves: Linn ,(Line), Energy. I had several Canadian energy trusts, but then their federal government mucked the trust situation up, so I sold them.

2008 Jun 06 01:30 AM

[fxtrader07:]

don't expect the canadian govt to retreat on the new taxation regime. and even in the unlikely even that it will - it will only changes rules with effect to canadian investors.
interestingly, the changed taxation hurts foreign investors much more than canadians, and to some extent, it is an understandable move by the govt. (though surely not a job well done) there is zero reason why a foreign holder of a canroy should be treated better than a canadian.
that said, there have been many trustworthy experts who argue that the trusts will have to convert into normal corporations and that such move will lead to significant lower valuations.
is that adressed in the aforesaid report?

2008 Jun 06 06:28 AM

[NOWHEREMAN:]

Don't forget PGH

2008 Jun 06 06:52 AM

[longoil:]

There is essentially three classes of accounts that will be affected by the new tax regime.

1) Foreign investors will definitely suffer under the post income trust structure.
2) Canadian investors with RRSP accounts (American equivalent of IRA or ROTH accounts) will suffer as well.
3) Canadian investors with non-RRSP accounts (taxable investment accounts) will be relatively unaffected since they will be able to claim dividend tax credits for their trusts that have converted to corporate structures.

Many trusts will also be able to delay the affect of new 2010 legisilation on investors by taking advantage of large tax pools they have accumulated over the years.


On Jun 06 06:28 AM fxtrader07 wrote:

> don't expect the canadian govt to retreat on the new taxation regime.
> and even in the unlikely even that it will - it will only changes
> rules with effect to canadian investors.
> interestingly, the changed taxation hurts foreign investors much
> more than canadians, and to some extent, it is an understandable
> move by the govt. (though surely not a job well done) there is zero
> reason why a foreign holder of a canroy should be treated better
> than a canadian.
> that said, there have been many trustworthy experts who argue that
> the trusts will have to convert into normal corporations and that
> such move will lead to significant lower valuations.
> is that adressed in the aforesaid report?

2008 Jun 06 09:25 AM

[Brian27:]

Six months ago the trusts were a bargain. The Canadian government wants to reduce the corporate tax rate so the impact of trust convervison to corporation will be mitigated a bit.

But one has to value the trusts using the future corporate tax rate prevalent in 2011. Certainly, net income, cash flow and dividends will be lowered significantly. One should expect that alot of trusts will be bought out as 2011 approaches and the tax pools are used up, as the reason for their existence (tax shelter) will be gone.

2008 Jun 06 11:58 AM

[longoil:]

Brian,

The negative effect of the future tax rate was factored into income trusts immediately after the announcement of the new tax rate for income trusts on Oct 31, 2006. ERF lost $20 instantly from a peak in the mid-$60's in July 2006 (with crude oil in the mid-$60) and has never risen above $50 (in spite of $135 oil).

I am on a personal mission to make sure the Canadian conservative party pays for this Halloween surprise. I make it a point to tell all the seniors citizens I meet how their retirement funds have suffered significantly under Tory rule. Seniors are the most likely group to own income trusts and have a superb attendence record at the voting booth.

The problem at the time was the conservative party was trying to prevent badly run companies (like Bell Canada and Telus) from converting to income trusts to minimize their tax liability. They unfortunately decide to punish all existing income trusts in one swoop(including energy companies in Alberta that have created a plethora of high paying jobs for not only Alberta citizens, but for countless citizens of many economically depressed regions in Canada).


On Jun 06 11:58 AM Brian27 wrote:

> Six months ago the trusts were a bargain. The Canadian government
> wants to reduce the corporate tax rate so the impact of trust convervison
> to corporation will be mitigated a bit.
>
> But one has to value the trusts using the future corporate tax rate
> prevalent in 2011. Certainly, net income, cash flow and dividends
> will be lowered significantly. One should expect that alot of trusts
> will be bought out as 2011 approaches and the tax pools are used
> up, as the reason for their existence (tax shelter) will be gone.

2008 Jun 06 02:04 PM

[RW Glenn:]

PennWest (PWE) has over 4.1 million acres of land; a 10.3 reserve life; tax pools of $5.6 billion and excellent management. Debt levels and hedging positions are coming down making this my top pick. Transition from trust will be a breeze if prices hold up...lowering the dividends will provide more capital investment which, in turn, should raise the PE offsetting any reduction in price due to lower dividends. As a US investor, I like the current dividends but I can the capital gains (lower tax)!

2008 Jun 06 03:31 PM

[RW Glenn:]

Last sentence should read, "...but I can handle the capital gains (lower tax)!

2008 Jun 06 03:37 PM

[User 64880:]

Hi I own erf, hte, pwe and these qualify as qualified dividents. I like these three and will continue to own them until toward the end of 2010 as in 2011 the new tax laws go into effect....


On Jun 06 03:37 PM RW Glenn wrote:

> Last sentence should read, "...but I can handle the capital gains
> (lower tax)!

2008 Jun 08 04:12 PM