Posted 15 November 2006 - 10:03 AM
sensible to me - still, did like the dividends <G>
Oilpatch outrage? Give me a break
Claudia Cattaneo
Financial Post
Wednesday, November 15, 2006
CREDIT: Mikael Kjellstrom, CanWest News Service
John Dielwart of ARC Energy Trust, left, Sue Riddell of Paramount Energy Trust and Gordon Kerr of Enerplus Resource Fund announcing the formation of the Coalition of Canadian Energy Trusts in response to Ottawa's recently announced changes to tax rules for trusts.
At the height of the income trust debacle, some members of Canada's oilpatch were so outraged at the Tory government for messing with the income trust model they accused Prime Minister Stephen Harper of cooking up a new National Energy Program.
There were widespread warnings the entire industry would be so weakened by such an egregious move it would be swallowed up by foreigners. Some even predicted a Tory election loss due to a widespread backlash from income trust unit holders in Alberta.
Oh, please! The fact is, the oil industry has been deeply divided from the get-go about whether oil and gas trusts have been a blessing or a curse.
Even as trust executives -- and others who fed off the system -- were beating the war drums, many others in the oil and gas industry were, at the very least, indifferent. Some were saying: good riddance. A few were applauding the return to tax fairness. Others were squirming at the over-reaction.
The rift in the oil industry may be one of the reasons why the newly formed Coalition of Canadian Energy Trusts has apparently failed to even get a meeting with the federal government.
Since 2000, the trust sector has been a big part of Canada's oil and gas industry, replacing mid-sized companies. It now accounts for about 20% of overall production. It's made a big contribution to the development of mature fields. Trusts have made it possible for the sector to spread its wealth, rather than re-investing most of it in holes in the ground.
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But while adored by unit holders, trusts never achieved much industry standing because of perceptions they are not real companies, just distributors of cash.
Sector-wide, there has been a price to pay for trusts' expanding role. Unlike the mid-sized companies of the past, which were aggressive explorers, trusts -- with few exceptions -- have been deadbeats as far as finding new pools.
Instead, they have been voracious acquirers of reserves from those that still did the heavy lifting, senior and junior exploration companies.
Trusts used their cash flow for distribution to unitholders rather than to build a business on their own.
Because their tax-favoured status allowed them to be big spenders, they contributed to bidding up prices for land and services, raising costs for everyone. Many oil companies complained they could no longer win lands because they could not compete with trusts. Oilfield services costs in Western Canada are so high conventional companies are slashing back spending with a vengeance.
High oil and gas prices propped up the trust model. But with the struggle to find reserves intensifying every year across the basin, it was only a matter of time before the trust sector was in serious trouble.
Already, some trusts were making acquisitions outside the business to maintain distributions. In fact, Ottawa's trust phase-out may have averted a trust sector meltdown of its own doing.
A shrinkage of trusts is sure to promote more exploration, which is what the basin needs if it's to continue to at least replace what it produces. Junior companies will have little choice but to get bigger rather than sell out to a trust, which has been their main exit strategy. The best trusts will convert back to corporations and rediscover how to build their own reserves. Big companies will have to continue to work their mature properties rather than put them on the market, often for no other reason than to take advantage of trusts' deep pockets.
The biggest advantage of Ottawa's trust move is that market pressure to convert is off, halting the domino effect. It was getting to the point at which even growing companies, the gems of the oilpatch, those that had no reason to be trusts, were under the gun to justify the status quo. EnCana Corp., the largest in the sector, was ready to succumb, as it revealed last week.
As for an increase in foreign takeovers, it's an empty threat for the most part. Foreign companies that want to grow in Canada will want growing businesses, not mature properties, and few trusts will appeal to them. Ottawa's trust shakedown may even discourage foreigners from acquiring in Canada. They dislike changes to the rules of the game. Those that are still keen to expand here will do it based on much broader objectives, such as their view of oil prices and the promise of the land.
© National Post 2006
best,
klh
Let's hope they were bargains this week.
cheers,
john
