Paul Haavardsrud
Financial Post
Thursday, September 12, 2002
CALGARY - No issue in the oil and gas royalty trust sector has received more attention in recent months than the millions of dollars involved in bringing existing managers in-house, thereby eliminating onerous management contracts currently in place.
The sector-wide practice of giving acquisition and disposition fees to outside management teams has drawn heavy criticism as trusts have exploded in size and popularity.
Arguably necessary for the nascent sector five years ago, investors believe these conventions no longer align the interests of management and unitholders.
Recent decisions by ARC Energy Trust and Shiningbank Energy Income Fund to eliminate these potential conflicts by internalizing management -- hailed as progressive moves for the sector -- are seen as the beginning of a wholesale shift in the industry, similar to the one real estate investment trusts underwent several years ago.
Nevertheless the cost to buy out and retain existing management teams -- $55-million in ARC's case and $20-million for Shiningbank -- has drawn criticism from investors, upset with executives apparently getting rich at the expense of unitholders.
In a new report on the royalty trust sector by Ross Smith Energy Group Ltd., an independent energy research boutique based in Calgary, author Hugh Gillard raised several points oil and gas trust investors should consider when looking at future buyout packages.
To be clear, Mr. Gillard is in favour of internalization due to: better alignment of interests with unitholders; fewer deterrents to industry consolidation; the probability of improved corporate governance and the possibility of better access to capital from institutional investors.
However, he says choosing to bring management in-house at perhaps the very peak of the business cycle for trusts could be seen as opportunistic.
Contract termination values should not be based on a continuation of past fees, but on a weaker future outlook, due in part to the increased number of trusts and heavier competition for acquisitions.
Investors also need to be careful not to interpret the deals cut by ARC and Shiningbank as representative of the sector when viewing future proposals.
"Certainly you wouldn't want [ARC or Shiningbank's management] to walk out the door on you," Mr. Gillard said. "But what happens when a poor performing trust comes out with this type of deal? Maybe the unitholders don't want that management team to continue to operate."
John Dielwart, ARC's president and chief executive, who has spent much of the last month justifying why $55-million is a fair number for the 73 members of ARC's management team, agreed that investors will need to scrutinize each internalization proposal on a case-by-case basis.
"Anyone that thinks what we did or what Shiningbank has proposed is a blueprint for the sector, I don't believe that's the case," Mr. Dielwart said. "I think everyone has to stand on its own merit based on performance."
With shareholder bases typically made up of a large number of retail investors, the onus will fall even more heavily on the relatively small institutional investors involved in the trust sector to do the proper due diligence on each proposal.
- Income trusts continue to be the sector of choice during the bear market, enticing investors with the prospect of both a healthy yield and the potential for capital gains in the underlying units.
In August, the CIBC World Markets Income Trust index was up 2.1%, bringing its year-to-date total to 14.3%. The S&P/TSX composite index, in contrast, is still down 13.1% year-to-date after rising 0.2% last month.
Oil and gas royalty trusts, meanwhile, are up an impressive 20.2% this year, with several names including: Advantage Energy Income Fund, Bonterra Energy Income Fund, Provident Energy Income Fund, and Ultima Energy Trust clocking year-to-date total returns of more than 50%.
On the power and pipelines side, Great Lakes Hydro Income Fund, Boralex Power Income Fund, and Gaz Métropolitain and Co., lead the pack with total returns greater than 11% so far this year, according to the latest data from CIBC World Markets.
e says choosing to bring management in-house at perhaps the very peak of the business cycle for trusts could be seen as opportunistic.
Contract termination values should not be based on a continuation of past fees, but on a weaker future outlook, due in part to the increased number of trusts and heavier competition for acquisitions.
Investors also need to be careful not to interpret the deals cut by ARC and Shiningbank as representative of the sector when viewing future proposals.
"Certainly you wouldn't want [ARC or Shiningbank's management] to walk out the door on you," Mr. Gillard said. "But what happens when a poor performing trust comes out with this type of deal? Maybe the unitholders don't want that management team to continue to operate."
John Dielwart, ARC's president and chief executive, who has spent much of the last month justifying why $55-million is a fair number for the 73 members of ARC's management team, agreed that investors will need to scrutinize each internalization proposal on a case-by-case basis.
"Anyone that thinks what we did or what Shiningbank has proposed is a blueprint for the sector, I don't believe that's the case," Mr. Dielwart said. "I think everyone has to stand on its own merit based on performance."
With shareholder bases typically made up of a large number of retail investors, the onus will fall even more heavily on the relatively small institutional investors involved in the trust sector to do the proper due diligence on each proposal.
- Income trusts continue to be the sector of choice during the bear market, enticing investors with the prospect of both a healthy yield and the potential for capital gains in the underlying units.
In August, the CIBC World Markets Income Trust index was up 2.1%, bringing its year-to-date total to 14.3%. The S&P/TSX composite index, in contrast, is still down 13.1% year-to-date after rising 0.2% last month.
Oil and gas royalty trusts, meanwhile, are up an impressive 20.2% this year, with several names including: Advantage Energy Income Fund, Bonterra Energy Income Fund, Provident Energy Income Fund, and Ultima Energy Trust clocking year-to-date total returns of more than 50%.
On the power and pipelines side, Great Lakes Hydro Income Fund, Boralex Power Income Fund, and Gaz Métropolitain and Co., lead the pack with total returns greater than 11% so far this year, according to the latest data from CIBC World Markets.
ENERGY INCOME TRUST REPORT 09.10.02:
Figures supplied by CIBC World Markets
YTD Market
Close Monthly YTD total Units Cap Annual Current
Power & Pipelines Ticker 09.10.02 chg.1 chg. return O/S (mil.) ($mil.) $ distr.2 % yield
Algonquin Power Income Fund APF.un $9.91 6.6% -4.7% 1.9% 57.7 572 $0.92 9.3%
Boralex Power Income Fund BPT.un $10.75 4.9% 7.5% 12.1% 40.6 436 $0.88 8.1%
Calpine Power Income Fund CF.un $10.00 na 0.0% 0.8% 52.0 520 $0.94 9.4%
Clean Power Income Fund CLE.un $10.45 3.6% 1.4% 7.0% 21.2 222 $0.93 8.9%
Great Lakes Hydro Income Fund GLH.un $14.60 2.9% 9.0% 15.4% 48.3 705 $1.17 8.0%
Fort Chicago Energy Partners L.P. FCE.un $8.01 2.6% -13.4% -8.1% 73.6 590 $0.64 8.0%
Gaz Métropolitain and Comp L.P. GZM.un $18.32 2.1% 4.1% 11.4% 110.5 2,024 $1.28 7.0%
Koch Pipelines Canada, L.P KPC.un $6.56 -3.2% -4.2% 3.2% 73.2 480 $0.68 10.4%
Northland Power Income Fund NPI.un $11.30 4.6% -2.6% 4.3% 30.8 348 $0.96 8.5%
Pembina Pipeline Income Fund PIF.un $11.44 -0.1% 1.1% 8.1% 91.7 1,049 $1.05 9.2%
Taylor NGL L.P. TAY.un $4.47 -1.8% -2.0% 5.3% 9.7 43 $0.40 8.9%
TransAlta Power, L.P. TPW.un $9.23 3.1% 0.3% 7.7% 34.0 314 $0.75 8.1%
TransCanada Power, L.P. TPL.un $32.70 2.3% 3.0% 8.9% 39.3 1,285 $2.52 7.7%
* 1. Percentage change from 30 days prior. 2. Last 3 months' actual distribution annualized.
YTD Market Est.
Close Monthly YTD total Units Cap Annual Current reserve
Canadian Oil & Gas Ticker 09.10.02 chg.1 chg. return O/S (mil.) ($mil.) $ distr.2 % yield life3
Acclaim Energy Trust AE.un $4.20 -4.5% 27.3% 42.1% 32.1 135 $0.72 17.1% 9.7
Advantage Energy Income Fund AVN.un $11.93 4.6% 46.9% 61.8% 27.1 323 $1.56 13.1% 10.5
APF Energy Trust AY.un $10.52 0.4% 6.8% 20.5% 22.3 235 $1.80 17.1% 9.0
ARC Energy Trust AET.un $12.57 -0.2% 3.9% 14.8% 122.4 1,539 $1.56 12.4% 11.5
Bonterra Energy Income Trust BNE.un $10.15 0.5% 43.0% 58.7% 13.4 136 $1.44 14.2% na
Enerplus Resources Fund ERF.un $27.25 -3.0% 10.1% 19.6% 69.7 1,899 $3.36 12.3% 14.0
Focus Energy Trust FET.un $9.70 na 0.0% 1.1% 28.6 277 $1.32 13.6% 9.5
Freehold Royalty Trust FRU.un $11.10 4.7% 20.7% 30.8% 30.2 335 $1.48 13.3% 12.7
NAL Oil & Gas Trust NAE.un $10.00 0.9% 9.9% 22.6% 33.1 331 $1.48 14.8% 8.8
NCE Petrofund NCF.un $11.89 2.9% -0.7% 9.9% 54.1 643 $1.68 14.1% 10.0
Pengrowth Energy Trust PGF.un $14.80 -1.6% 4.1% 13.6% 90.3 1,336 $1.92 13.0% 13.8
PrimeWest Energy Trust PWI.un $25.79 0.6% 1.4% 15.5% 33.4 861 $4.80 18.6% 10.0
Provident Energy Trust PVE.un $10.85 -2.1% 32.5% 52.7% 36.7 398 $2.04 18.8% 7.7
Shiningbank Energy Income Fund SHN.un $14.75 1.6% 5.6% 16.6% 33.1 488 $2.16 14.6% 9.7
Ultima Energy Trust UET.un $5.70 5.2% 35.7% 51.0% 23.8 136 $0.96 16.8% 10.0
Viking Energy Income Trust VKR.un $7.49 3.7% 16.7% 30.1% 54.2 406 $1.20 16.0% 10.4
* 1. Percentage change from 30 days prior. 2. Last 3 months' actual distribution annualized 3. Based on most recent report by the income trust, if disclosed, or CIBC World Markets estimate. |
