Commodity boom puts the sparkle back in energy trusts
Healthy cash distributions spur investor interest
Ian McKinnon
Financial Post
CALGARY - Income funds and trusts focused on the energy industry, sometimes regarded as the ugly duckling of the oilpatch, are again becoming attractive to investors because of booming commodity prices.
Announcements by firms such as NAL Oil & Gas Income Trust, which said yesterday it is handing out an extra 5.5¢ per unit this month because of high oil and gas prices, have enabled a few energy funds to outperform (on a total return basis) the oil and gas producers index on the Toronto Stock Exchange, one of the exchange's hottest benchmarks this year.
"A number of the income trusts are dependent on the underlying commodity price and oil and gas prices have been on a big round trip over the last few years," said David Ramsay, a Toronto analyst with CIBC World Markets. "That was a big part of them falling out of favour and a big part of them coming back into favour."
Also favouring the investment vehicles, which generally pay monthly cash distributions that return a portion of the buyer's original capital, is the distaste in equity markets for small producers. This has allowed players such as PrimeWest Energy Trust and EnerMark Income Fund to snap up junior producers, adding reserves and production without any risk of exploration failure.
Kent MacIntyre, vice-chairman and chief executive of PrimeWest, which has twice boosted its cash distributions this year, said better commodity prices, a more established track record and consolidation within the sector have combined to revive the stocks, which were badly hurt by the crash in crude prices in 1998 and 1999.
"Now that we have outperformed the producers and with less volatility, we'll start getting some recognition for that," he said.
"We now have a track record to substantiate or validate the investment."
But the bloom is not shared by all income funds and trusts rooted in the energy sector.
Luscar Coal Income Fund, which has been hammered by falling export prices for coal, said last week it is unlikely to have cash distributions for several years.
Other signs of trouble include Alberta Energy Co. buying back the public float of a limited partnership set up three years ago for its pipeline assets. The move was partially sparked by lack of investor interest, AEC officials said.
Drayton Valley Power Income Fund, which operates independent power projects in Alberta and Ontario, said this week that it had hired National Bank Financial Inc. to advise it on strategic alternatives.
Arie Prins, vice-president of finance at DVP Management Corp., said operational problems at two power plants and loss of investor confidence had dragged Drayton Valley's shares down to less than $3 from $12 two years ago.
Income trusts are largely a retail play and the lack of institutional support hurts when unexpected events slice into distributions, Mr. Prins said.
"You get murdered in the short term if you're not distributing well," he said.
"When you're an income trust and you're not distributing great income, it's hard to convince the public for the long term that you have a good, strong and viable fund."
With most forecasters predicting oil and gas prices will remain robust for at least the next year, if not longer, cash distributions will stay healthy and continue to bring money into the sector, observers said.
"For people who are looking for a good cash flow return on their portfolio and aren't just interested in watching and compounding longer-term capital gains, I think they are a terrific vehicle," said Mr. Ramsay of CIBC.
imckinnon@nationalpost.com |
