Hi DJ, <<OK, Im still waiting>> I believe, that is I surmise, understand, and can perhaps justify the reasons that the royalty trusts distribute their income as well as capital are as follows:
(a) The royalty trusts annually distribute the cash equivalent to all of their accounting net income because otherwise they must pay income tax on the portion that is not distributed;
(b) The royalty trusts (I am actually now only qualified to post about Enerplus Resources Fund) distribute a great majority of their accounting 'Depletion, depreciation and amortization' cash flow because:
- the timing of their purchase of additional oil/gas reserves is not always altogether certain, and so it is better for their investors to hold the cash flow from depletion of existing reserve than it is for management to hold the same cash (remember: money is good, more is better than less, now is better than later, in my pocket is better than in their wallet);
- existing shareholders should have the option to not invest in additional oil/gas reserve at any time they feel such reserve addition is not priced right, and in the case where depletion is paid back to the original investor on as depleted basis, the freedom of choice is protected;
- each time new oil/gas reserve are purchased with newly aggregated investor cash in exchange for freshly issued trusted units, the investor electorates are casting their vote (thumbs up for management, strategy, timing of oil/gas reserve add given then pricing of same, etc); and
- Enerplus’ use of long-term debt is prudently limited to approximately under two year’s worth of distribution to investors, and this limits the amount of mischief that can be done.
Now, having just conducted the most thorough desk-top due diligence on any financial asset I have ever owned, I believe, at least in the case of Enerplus:
(a) It must be a performance oriented company, and should their operating strategy falter or their management philosophy change in a way not to investors’ liking, the punishment would be immediate;
(b) It must continue to remain quite transparent, because it is at this time extremely transparent, especially when compared against almost all of the financial and manufacturing companies, on par or slightly less than the real estate trusts (counting buildings is easier than tallying up gas molecules);
(c) It must remain simple, by charter, without basic R&D, product development, marketing, advertising, complicated distribution channel management, and tedious after-sales service. In other words, stay away from many of the tasks that GE, CitiGroup, JPMorgan Chase, ABB, AOL, Enron, Ahold, Qwest, WorldCom, Pfizer, Amgen, Qualcomm, … must keep at, and simply stay true to: raise new money, buy oil/gas reserve, farm-in/farm-out exploitation, tweak reserve extension at the margin, pump production into pipe, collect money from customers, distribute most of cash flow, and convince investors to stay with the company yet again.
The business, its ways and means, the underlying philosophy, the practical implementation, the checks and balances, and, especially, the tundra-cold cash distribution flow, must all be admired, and in my case, rewarded with a vote by casting some investment moolah.
I intend to model all the royalty trusts I hold, but I will need some time.
I will continue with the model making today for valuation, and compare-valuation.
I think Enerplus is a good business, but I do not yet know whether it is valued correctly or not. I do hold 0.44% of my gross asset and 2.37% of my stock portfolio value in Enerplus, comparable to my holdings in Pakistan’s Hub Power, or China’s Petro China, but a third more than America’s Qualcomm, and twice as much than Zimbabwe’s Zim Platinum:
Toronto quote uk.finance.yahoo.com
NYSE quote uk.finance.yahoo.com
Company profile oilpatchupdates.com
The data trove sedar.com
My total allocation to royalty trusts is 2.7% of gross asset and 14.7% of stock portfolio value (compared to 17.5%/3.2% for gold sector, 9.8%/1.8% for petroleum sector, and 7%/1.3% and 5.8%/1.1% for China and Argentina, respectively).
I have a starting stake in the following:
uk.finance.yahoo.com
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Chugs, Jay |
