canroys, from my broker:
Energy trusts scale back payouts
VIRGINIA GALT AND DAVID EBNER
Friday, January 19, 2007
TORONTO AND CALGARY — Four Canadian energy trusts slashed
distributions to unit holders this week, and more are expected to
follow, because of falling oil and gas prices and uncertainty in the
capital markets over the federal tax changes for income trusts.
Precision Drilling Trust and Enterra Energy Trust said Friday that
they were reducing their monthly cash distributions, a day after
Shiningbank Energy Income Fund and Progress Energy Trust announced cuts.
These cuts were not unexpected and three or four other energy trusts
are likely under pressure to make similar moves, said Sandy McIntyre,
senior vice-president of Sentry Select Capital Corp., in an interview
Friday.
While he would not name the companies he believes are most likely to
have to cut distributions, Mr. McIntyre said investors should watch
for several tell-tale characteristics. "High debt to cash flow and
high trailing payout ratio — it is very likely that these people are
going to be put in a situation where they are forced to cut. One of
the things I think is a pretty good indication of risk is: What is
your distribution yield?" said Mr. McIntyre.
Analysts in Calgary noted that the energy trusts with the highest
yields on the S&P/TSX energy trust index are True Energy Trust, which
announced on Monday that it is converting back to a traditional
corporation, and Shiningbank, which on Thursday announced its third
distribution cut in the past year.
The next four names, all near 20 per cent yields, are Paramount Energy
Trust, Harvest Energy Trust, Daylight Resources Trust and Trilogy
Energy Trust, indicating investors think their distributions could be
in trouble.
One Calgary broker advised clients on Friday that others likely to cut
distributions are Thunder Energy Trust, Pengrowth Energy Trust and
Provident Energy Trust.
Thunder isn't in the energy trust index and its yield on Friday was
26.7 per cent.
Mr. McIntyre said that the cuts by Precision Drilling, Enterra,
Shiningbank and Progress were "absolutely the correct thing to do" in
the face of falling commodity prices.
Oil and gas prices are expected to recover but, in the meantime, the
trusts have to cut distributions, analysts said.
Precision Drilling, Canada's largest energy services trust, announced
Friday that it is reducing its monthly cash distribution by 39 per
cent, to 19 cents a unit from 31 cents. The Calgary-based oil and gas
services firm said the move was forced by a "persistent decline in
natural gas and oil price trends."
On the heels of Precision Drilling's announcement, Calgary-based
Enterra Energy Trust said it was halving its cash distribution to 6
cents (U.S.) from 12 cents. The company cited three factors:
"significantly weaker commodity prices, capital market uncertainty
resulting from the recent tax changes proposed by the Canadian
government and early conversion from debentures to trusts."
In afternoon trading on the TSX Friday, units in Precision Drilling
were weaker by 92 cents (Canadian) to $26.70, while units of Enterra
tumbled by more than 13 per cent to $8.30.
Shiningbank Energy Income Fund, which cut its distributions by 35 per
cent to 15 cents a unit from 23 cents, was up 25 cents to $13.03 in
Friday afternoon trading. In a note to clients Friday, analyst Brad
Borggard of CIBC World Markets had observed that Shiningbank closed
down only 3.6 per cent on the day Thursday, after announcing the cuts,
"indicating . . .that the market had partially priced in the
expectation of a cut." Mr. Borggard reiterated his "sector performer"
rating and left his target price for the units unchanged at $13.50.
"Similar to other trusts that have recently revised their distribution
rates, Shiningbank cited weak natural gas prices as a primary driver
of the cut," Mr. Borggard wrote.
Precision Drilling Trust explained Friday that its financial
performance is closely tied to that of its customers. "As lower
commodity prices are realized by natural gas and oil producers, their
ability to fund exploration and development activities may become
impaired," the company said. "This has resulted in a reduction in
equipment utilization on a seasonally adjusted basis for precision."
Precision provides access to an extensive fleet of contract drilling
rigs, service rigs, camps, snubbing units, wastewater treatment units
and rental equipment, backed by technical support services.
Keith Conrad, president and chief executive officer of Enterra, said
his company's decision to cut its distributions "is the prudent
business course in the light of present uncertainties.
"It is fundamental to our business to maintain a healthy reinvestment
program in our core areas and on our extensive undeveloped land base,"
he said.
"While I remain optimistic about the long-term strength of energy
prices, at present it is wise to preserve maximum flexibility for
generating long-term value. In the meantime, we continue to execute
our business plan and to assess alternatives in order to remain
competitive in light of the government's recently announced Tax
Fairness Plan."
The federal decision to tax income trusts was also a factor in
Shiningbank's cut, Mr. Borggard said in his research note. "Management
believes a lower payout ratio model is required given the higher cost
of capital the trust sees following the government's decision to begin
taxing trusts."
Precision Drilling said its distribution of 19 cents per unit for the
month of January will be payable on Feb. 15. The trust had previously
announced that its distribution reinvestment plan had been suspended
until further notice.
The reduced Enterra distribution, also to be paid Feb. 15, "is
consistent with Enterra's policy of maintaining a conservative payout
ratio in order to fund organic growth," the company said.
Since July, 2006, oil and gas benchmark prices have fallen 25 per cent
on a company weighted average basis, Enterra said.
"Oil has dropped 35 per cent from peak values and mild winter weather
across North America has left natural gas distillate and fuel oil
inventories unusually high. These circumstances have resulted in soft
and volatile commodity markets."
The federal government's decision to make distributions from income
trusts taxable in the hands of the trust, similar to the tax treatment
of corporate dividends, has also created uncertainty.
"This unexpected announcement has put into question the existing
business plans of many income trusts and hindered the ability of many
trusts to freely access capital markets at competitive costs of
capital," the company said.
Using a conservative outlook for 2007 commodity prices, "this change
will result in the trust's distribution ratio for 2007 being below its
target payout range of 60 per cent to 70 per cent," Enterra said.
Mr. McIntyre said the business is very capital intensive.
"When you end up with a situation where your production declines have
to be met and your commodity price falls, the ratio between the
dollars available for distribution and the dollars available for capex
changes — and you are forced to cut your distributions," Mr. McIntyre
said.
© The Globe and Mail
here's my take on it all:
the price mostly moves in tandem with oil and gas, which is down
the canadian tax situation is priced in already and priced in as a worst case scenerio
the canadian government is making way for a smooth transition - the trusts can double their equity bases before 2011 - also can convert to a corporation with no penalty
if they go corporate, they will find ways, like all corporation, to dodge taxes, hence not pay out the full corp tax rate
since gas and oil are significantly down, I would expect distributions to get cut
having said all that, I may, in the future switch HTE to PWE - HTE isn't as high quality as PWE and HTE made a series of acquisitions last year that have yet to play out - the refinery acquisition is a positive
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