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Gold/Mining/Energy : Canadian REITS, Trusts & Dividend Stocks
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To: a.handbag. who wrote (3423)6/12/2002 12:35:42 AM
From: Lorne Larson  Read Replies (1) of 11633
 
One often hears the "return of capital" and "depleting reserves" arguments when it comes to oil and gas trusts. What the proponents of these arguments fail to understand (or perhaps purposely ignore) is that the oil and gas trusts are basically a developed reserve monetizing vehicle for the E&D energy compamies. An E&D company which has developed fields wants to use that value to fund further exploration. One answer is to borrow against that asset. Another answer is to sell the field. However up until the arrival of the oil and gas trusts, there was a limited number of possible purchasers. Now, the oil and gas trusts fill that niche very nicely. The E&D company can either sell the developed fields to a trust, or spin-off a trust (Paramount being the most recent example). The trust is looking for steady cash flow and low capex (or at least capex where they are dealing with proven reserves).

The key is that the trust buys the assets at less than market value. In other words buy at $8.00 per BOE, and sell at $25 per BOE. The E&D is prepared to sell because it is a convenient way of completely monetizing its developed assets, and there are few alternatives, except more debt.

The trusts are of course constantly on the acquisition trail because they have to replace depleting assets. As long as they buy low and sell high, there is no element of a Ponzi scheme. Unfortunately many of the trusts were buying way too high last year. The PWI/Cypress deal is the prime example, although PWI covered their risk a bit by immediately hedging a large part of their production. AVN and PVE, on the other hand, appear to have delayed major acquisitions until prices dropped.

This is not rocket science. Any analyst who criticizes the oil and gas trust sector as a whole based on "Ponzi Scheme" type arguments is either lazy in his analysis, too stupid to understand how these things work, or intentionally misleading. In the absence of libel laws I would mention a few names.
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