Canadian Energy Trusts

[FarmerGeorge]

Does anyone else hold any of these?

There are some pretty crazy yields out there right now and as there generally is no free lunch in the markets 15%+ should carry a decent amount of risk.

But anything I've researched (changes in Canadian Tax laws/refining margins/oil prices) doesn't seem to add enough risk to justify, for example, HTE shedding 17% a year in payouts alone.

Anyway I've bought a few as I can't see any reason not to (as opposed to some dodgy as Finance Co. in NZ paying 10% on capital only). Would be interested to know if anyone else out there holds, or has an opinion.

Cheers.

[FarmerGeorge]

Looks like no-one else is out there to comment and very few views. I've bought into Harvest (HTE) and Canetic (CNE) and seen a couple of percentage points rise in capital but no distributions yet. There is also some takeover activity about, which may lead to a premium on the sector. Am looking for a third trust now to add, one with predominantly liquid oil assets (as opposed to natural gas/shales). Will probably make these altogether about 10-15% of portfolio unless conditions change. Canadian government is also looking at ways to curb carbon emissions which will be particularly bad for oil sands/shales producers.

[Snapper]

Hi Farmer George
I've had a look at these but as yet have done nothing. I think that the big distributions come about because they hold investments in established operations which have a finite lifespan. I haven't really had a look at them in any depth, though. Here's an excerpt from another thread...

Quote:
Originally Posted by Snapper
Hi Lakedaemonian (where did that name come from??), would you elaborate on those Canadian Royalty trusts you mentioned. Are there any sites that have info on them?

Thanks
Snapper

Hi Snapper.....

The name is derived from one accepted spelling of the people that inhabited the area in Greece most commonly known as Sparta, way back when.

As far as Canadian Royalty Trusts...they trade both in Canada and the US exchanges.

A number traded on the US exchanges include:

AAV
PWI
BTE
CNE
ERF
HTE
PGH
PWE
PVX

I've owned the first two for quite some time before MOSTLY divesting recently.

They generally offer outstanding dividend payouts(some not sustainably), and I try to stick with the ones that offer the best "bang for buck" AND longest reserve life.

I believe they represent a solid energy and currency hedge as well as a somewhat consistently strong income stream.

They've done well for me and I'll probably look at them again in the future.

But right now, outside of my NZ based businesses and dairy farm I'm sticking mostly to cash(holding NZR, NZOOD, and small holdings left in Canuck Royalty Trusts).

The future has never looked more opaque to me than right now...with more downside risk than upside(in my opinion)...so I'll sit in cash with Kiwibank at 8% until things come into sharper focus.
Hope this helps
Cheers

[FarmerGeorge]

Thanks Snapper I think you're right about the way the payouts are funded, they don't seem to do any exploring, just buying up producing fields and paying out their profits.
Even so I would have thought that that sort of yield would usually attract enough buyers to push the price up until the yield looked a bit less attractive. My feeling is actually that I may be undervaluing some aspect of risk, or missing altogether a piece to the puzzle.
All I've done is go through which trusts are listed on the US exchange and look through their quarterlies to make sure cashflow covers distribution payments, and by how much. Then I've looked at assets/liabilities and resource size (many of these trusts borrow heavily to buy resources as most of their earnings disappear as distributions). Using these two ratios gives me some idea of the risk inherent.
My next task will be to look at the source of earnings (oil/natural gas/whatever) and make a decision as mentioned above. Then I just compare the % yields to come up with the trust most likely (in my mind) to yield well, survive AND maintain it's payout. If I get it right I should get a nice income to reinvest elsewhere and potentially even a capital gain as the market catches on. IF I get it right.

Advantage Energy Income (AAV)
Baytex Energy Trust (BTE)
Canetic Resources Trust (CNE)
Enerplus Resources Fund (ERF)
Harvest Energy (HTE)
Pengrowth Energy Trust (PGH)
Penn West Energy Trust (PWE)

are the ones I'm looking at currently, I'm leaning towards PGH (plus current holdings) but haven't looked at any resource bases yet so can't really recommend any. Good luck Snapper I reckon they are as good a place as any to start your research.

[lakedaemonian]

I'm now completely out of CanRoys.

I was holding AAV and PWI.

AAV has had a great dividend and a reasonable capital gain.

PWI has had a great dividend and I took advantage of the capital gain spike from the recent buyout offer.

I'm sitting on the sidelines for now......but will be keeping a close eye on CanRoys as I'm bullish on them long-term.

One thing that pushed me to buy AAV & PWI is that both have been growing their reserves apparantly through acquisition.

For now, I'm focused on developing private businesses until I start seeing more compelling values in the sharemarket.

Good luck...I reckon you could do a LOT worse than investing in CanRoys.

Keep a close eye on potential tax issues from 2011 (which should already be priced into the current share price) regarding CanRoys.

[FarmerGeorge]

Thanks lakedaemonian, the tax issues are definitely a consideration, some of the trusts are saying their 'effective' tax rate will not actually be what is proposed until well after 2011, although I don't fully understand that situation yet. Good advice to keep an eye on that.

Good luck with your own businesses, always quite a scary/exciting time when you start your own company, as I recall you're into dairying as well so hopefully will see some good returns soon - we have 450 cows in Canterbury, just spent a ridiculous amount on a centre pivot but hopefully will be worthwhile.

[FarmerGeorge]

Here is a recent article on the energy trusts:

Earnings reporting season for Canada's energy trusts kicks off after Wednesday's market close with Progress Energy Trust, followed by other major players in the sector over the next two weeks. Analysts will be paying close attention to rising payout ratios - calculated as the percentage of cash flow the trusts distribute to their unitholders - as they speak volumes about the sustainability of cash distributions at their current levels.

UBS Securities Canada analyst Grant Hofer estimates that as a group, the trusts' payout ratio will climb to an average of 71 per cent for the third quarter, from 67 per cent in the second quarter and 68 per cent a year earlier. He blamed the rising ratio on an expected 10-per-cent decline in cash flows from a year earlier, fuelled by weaker natural gas prices and a stronger Canadian dollar.

Cash distributions are a key attraction for investors, and trusts are hesitant to reduce them, as cuts typically deal a major blow to unit prices. But a payout ratio near or above 100 per cent, for more than the odd quarter, suggests an energy trust that would have trouble sustaining its level of payouts over the longer term.

Only one trust under UBS's coverage is expected to have a payout ratio above 100 per cent - Harvest Energy Trust, at 109 per cent. Mr. Hofer said Harvest, the only company in the sector with significant refining and marketing operations, should see its cash flow tumble 43 per cent from the second quarter (and 26 per cent from a year earlier), due mainly to shrinking regining margins. Harvest has maintained monthly distributions of 38 cents a share since early 2006, and its payout ratio was just 62 per cent in the second quarter.

Others with high estimated payout ratios are Pengrowth Energy Trust (94 per cent) and PrimeWest Energy Trust (89 per cent).

Mr. Hofer predicted that two trusts whose production is heavily weighted toward oil - Vermilion Energy Trust and Crescent Point Energy Trust - are poised for solid year-over-year cash flow gains of 10 per cent and 13 per cent, respectively, as they benefit from record oil prices. Vermilion is expected to boast the lowest payout ratio of the group, at just 32 per cent.



I hold Harvest and knew if was covering its payments no worries (see para about Q207) but didn't realise the expectations on its payout cover were this negative. This looks like a good warning article to be aware of.

[FarmerGeorge]

Further takeover activity in the sector has given a wee push to prices bringing the yields back a little, but not much. MY CNE got caught up in it last week:



Penn West to Buy Canetic Resources for C$3.6 Billion (Update4)

By Sonja Franklin and Fred Pals

Oct. 31 (Bloomberg) -- Penn West Energy Trust, Canada's second-largest energy trust by market value, agreed to acquire Canetic Resources Trust for about C$3.64 billion ($3.83 billion) to cushion the impact of a new tax.

The accord, made public today, came on the one-year anniversary of the Canadian government's announcement that it would begin taxing income trusts starting in 2011 to increase revenue. The combined trust would have tax pools, or accrued credits used to reduce payments, valued at about C$5.5 billion at the end of 2007, according to the statement.

``Canetic gives them more scale,'' said Gavin Graham, who helps manage C$6 billion at Guardian Group of Funds in Toronto, including more than 1 million Penn West units. ``If you are bigger you have got more tax pools. This is the advantage of doing something like this.''

The combined trust would have production of 200,000 to 210,000 barrels of oil equivalent a day, about 60 percent of which would be in Alberta, and conventional proven and probable reserves exceeding 800 million barrels, the Calgary-based trusts said in a statement. Penn West unitholders will own about 67 percent of the new trust.

Canetic unitholders would receive 0.515 of a Penn West unit and a distribution of 9 cents per Canetic unit just before the closing, according to the statement. That values the offer at C$15.84 a Canetic unit, 7.1 percent above yesterday's closing price.

Consolidation

Canadian trusts have consolidated through acquisitions or mergers since the government's announcement. Abu Dhabi National Energy Co., the state-controlled power generator and oil producer, on Sept. 24 agreed to buy PrimeWest Energy Trust for about C$4 billion. Penn West on Sept. 25 agreed to buy Vault Energy Trust for C$170 million.

Penn West Chief Executive Officer William Andrew, on a conference call with analysts and investors, affirmed his intention, announced in May, to keep Penn West a trust until 2011 and possibly beyond.

Penn West units fell 47 cents, or 1.5 percent, to C$30.12 on the Toronto Stock Exchange. Canetic rose 59 cents, or 4 percent, to C$15.39.

The combined trust, which would operate under the Penn West name and be led by Andrew, would have conventional oil and gas fields in western Canada in addition to unconventional resources such as oil sands and enhanced oil recovery.

Production Mix

About 45 percent of the combined trust's production would be light oil and natural gas liquids, 42 percent gas and 13 percent heavy oil, Canetic CEO J. Paul Charron, who would become president, said on the call. The combined trust would have a capital budget of C$900 million to C$1 billion in 2008.

The combined tax pool would be 1.5 times bigger than Penn West's current accrued credits, Andrew told reporters at a news conference in Calgary.

Canetic was formed through the 2006 combination of Acclaim Energy Trust and StarPoint Energy Trust.

The transaction is expected to be completed in mid-January, subject to approval by regulators and Canetic unitholders, the trusts said. At least two-thirds of Canetic holders must approve the deal.

Scotia Waterous Inc. advised Penn West. BMO Capital Markets and TD Securities Inc. advised Canetic.

Canadian Oil Sands Trust, lead partner in the world's biggest oil-sands producer, is Canada's biggest energy trust by market value.




I think we might see more as they all prepare for the rule changes in 2011. In other news some US citizens are looking to sue the Canadian government under NAFTA rules for instituting the turst tax changes in the face of election promises not to. I haven't recently added to the position but I think there are still more good opportunities in this sector, particularly relative to the risks.

[trendy]

I own HTE. Nice monthly distribution and falling US dollar means more dividend in US$.

Please note though that the Candians are looking to change the tax code as it applies to trusts from 2010 or 2011 i think. This could result in significant reductions in payouts see link below.

http://www.dividenddetective.com/canadian_royalty_trusts.htm

[FarmerGeorge]

I'm thinking it's almost worth setting up a US bank account as I'm bringing it all back to NZD at the moment!
Thanks for the heads up on the tax changes it's definitely an issue. I think most of the big players seem to be managing it pretty well. Also worth thinking about what the effective rate will be - most of the trusts will not be paying the full rate in 2011 but will have built up some tax credits to make effective rate much less for a few years after.

[FarmerGeorge]

Well, as expected (per article posted on the 27th) Harvest has downgraded their payout. It was a bit more than I though it would be, from 38c/month to 30c. This resulted in a bit of a pasting for the unit price which is back to a bit under what I paid. However even the downgraded payout is a tick above 13.5% return on what I put in so I'm not too upset. Long term the sector still seems to stack up pretty well.


CALGARY -- A swath of energy companies said this week that the impact of Alberta's increased royalty charges won't be as significant as some in the oil patch had initially feared.

Last month, Alberta announced that starting in 2009 it would boost the royalties it takes from oil and gas production in the province by around 20 per cent, a change that some industry players warned would cripple investment and affect future production.

However, in recently released quarterly financial results, some of Calgary's largest energy trusts have said they see relatively minimal affects to their operations, which should forestall predictions of doom and gloom, at least for now, say industry observers.

"The impact of the royalties will vary company by company, but to have so many firms say that they will only be marginally affected should calm people down," said independent Calgary-based analyst David Doig. "It seems the impact isn't going to be as bad as the worst-case scenarios predicted."

Since Thursday, Penn West Energy Trust, Harvest Energy Trust, Crescent Point Energy Trust, Prospex Resources Ltd. and Bonavista Energy Trust have all characterized the impact of the royalty increases upon their businesses as modest or minimal.

Penn West, Canada's second-largest energy trust, said the higher royalty rates would likely cost the company an additional 3 per cent of its cash flow.

"We're concerned that the government has increased its take from our sector," chief executive Bill Andrew said in a conference call. "But that's offset by the knowledge that additional funding is required to keep up with the needs of our expanding population, who we greatly depend on for our labour, our knowledge and our services."

Harvest Energy Trust said that while the royalty hike was a "negative event" for the Alberta oil and gas sector, "the impact to Harvest's current production is relatively neutral and could actually be marginally positive."However, Harvest, which operates the North Atlantic refinery in Newfoundland and Labrador, did reduce distributions by 21 per cent, a move analysts expected since narrowing refining margins were making the company's payout ratio unsustainable.

Not all companies are as mildly affected as these firms. The higher royalty rates for conventional oil production are seen as particularly oppressive for exploring juniors such as Highpine Oil and Gas Ltd., which estimates the increases will cut cash flow by 29 per cent.

"The royalty changes are discriminatory for companies engaged in high-risk, deep conventional oil exploration. ... [They] do not strike a balance between risk and reward in our composite drilling program," the company said in a statement.

Other companies, such as Provident Energy Ltd. and Enerplus Resources Fund, indicated that while they expect much of their operations to continue in Alberta - and could even make acquisitions in the province - they may still shift some activity to other provinces or into the United States.

Enerplus said the royalty hikes will hurt its business by $15-million to $20-million, or 2 per cent of cash flow, but it expects any impact on its oil sands strategy to be offset by the federal government's plans to reduce tax rates.



I'm not convinced everything will be as rosy as it's being painted but we'll see.

[FarmerGeorge]

Is the only word to describe the trend in Canadian Energy Trusts since I started this thread. I'm just not convinced that supply oil and gas is a losing bet right now but of course: you can't argue with the market. I haven't sold anything and I keep getting healthy sized monthly cheques so things aren't all bad but it would have been nice not to have given away 15% or so in capital to get them!
Am keeping an eye on this sector, I still like it long term but I'm very congisant of the fact I might be deluding myself.

[Snapper]

Any idea as to what's driving the negative sentiment? I'd have thought that with the Bank of Canada lowering interest rates (along with the Federal Reserve) it would have made these more attractive.

[FarmerGeorge]

I agree snapper. I see whole host of issues, some global: the possibility of environmental damages resulting in financial implications for those with oil, particularly oil sands, high CAD meaning Canadian producers getting paid in USD can't take full advantage of the rise in oil prices. Some industry specific: changing the trust structure so effective tax rates will rise, or high oil prices squeezing refining margins, or operating costs rising. Some company specific: Harvest cut their payout this quarter effective for the next three quarters and some companies payout ratios are getting uncomfortably high.


However I knew about, or suspected all these things coming in so perhaps there is something else on top which is driving the unit prices down. Honestly though if I don't find any further compelling evidence to the contrary I'll probably just buy a few more and enjoy my monthly cheques which I can then invest back into PDZ or some other high potential explorer/producer, maybe even BLT if I'm feeling generous ;)