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#1 PorkLoin



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Posted 02 November 2006 - 01:43 PM

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Sheesh -- yield is 22% now. If the dividend is maintained, and at current oil and NG prices I think it will be, buyers would get 90% of their money back before 2011, when the "normal" taxation rates would begin applying, and still own it.


#2 PorkLoin



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Posted 02 November 2006 - 06:36 PM

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Wow -- I am just amazed. Look at that volume and look at the weak close. Cirrus mentioned people not being able to tolerate the volatility of this stuff, and going home this weekend, thinking about it, and selling out on Monday. Man oh man how low will it go?

Yielding 22.22% as of the close. Before the new taxation rules are to kick in, in 2011, holders would get 49 monthly dividend payments, which would be over 90% of the current share price as long as the dividend is maintained, and with current oil and gas prices I think it would be.

"Interesting times."


#3 SilentOne



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Posted 03 November 2006 - 04:52 AM

Hi doug, I'm sorry to see this debacle for Canadian investors. There are so many Canadians (particularly seniors) relying on the regular income provided by this sector, and now it is getting ripped up. Bonds were for a long time now underperforming this sector. A serious amount of capital is being wiped out and it was due to an unsustainable tax arrangement for the income trusts. The proverbial straw that broke the camel's back was when BCE announced it was going to go to an income trust structure. With the prospect of Canadian Blue Chip companies (like the banks) thinking about a conversion, the Gov. panicked and felt it had to put a stop to it. This event was a long time in coming and it will be interesting to see how the Canadian dollar fairs in the coming months. A lot of capital is fleeing this space as foreign investors exit (hedge funds, professionals etc.). I would be very careful adding to any income trust positions you already own. The energy trusts may appear inviting given the advertised yields, there is now way to know how sustainable they will be over the coming years. Also, the oil and gas sector will probably not make a major rally until perhaps next year, but rather has entered a bear phase IMO. I think the trusts have reflected this possibility since hurricane Katrina. In a brief summer foray, I bought in July and then sold my gas trusts in late August. I have never really partcipated in the income trust scene because the tax advantages were always limited for me (as an expat I get taxed on interest income, not capital). I am shopping around for good business trusts that may will revert back to a dividend paying structure one day which I would put in my RRSP. Yellow Pages (YLO.UN) is on my watch screen. But as for the energy trusts, I'll want to see how they deal with the selling next week. Good luck! cheers, john
"By the Law of Periodical Repetition, everything which has happened once must happen again and again and again-and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law ..." - Mark Twain

#4 SilentOne



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Posted 03 November 2006 - 07:04 AM

Further to my post today.



Income-trust crackdown: The inside story

Thursday, November 02, 2006
Three weeks ago, almost to the day, Michael Sabia dropped an early-morning bombshell on Canadian investors: His company, BCE Inc., was planning to follow the lead of archrival Telus Corp. and transform its storied telephone operations into a $27-billion income trust.

It was a surprise to almost everybody. Everybody, that is, except Jim Flaherty. The night before, Mr. Sabia had tracked down the federal Finance Minister in Vancouver, where he was giving a speech on money laundering, and politely informed him of his intentions.

In most circumstances, this would have been regarded as a courtesy call. But for the burgeoning income-trust sector, it was the coup de grâce.

For several months, Mr. Flaherty and his team had been fretting about the rampaging advance of trusts. They had caught wind of rumours that Suncor Energy Inc. and EnCana Corp. were each modelling trust conversions that could be valued at close to $40-billion, opening the door to mass conversions in the oil patch.

High-profile directors and CEOs, meanwhile, had approached Mr. Flaherty personally to express their concerns: Many felt they were being pressed into trusts because of their duty to maximize shareholder value, despite their misgivings about the structure. Paul Desmarais Jr., the well-connected chairman of Power Corp. of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico, and told him he should act quickly to stop the raft of conversions, according to sources.

Amid this escalating tension, Mr. Sabia's phone call became a flashpoint, prompting the federal government to accelerate its crackdown on the sector. Mr. Flaherty was convinced the twin conversions of icons such as Telus and BCE would incite other corporate titans to follow in their wake.

Faced with this prospect, a select group of a dozen people in the Department of Finance and the Prime Minister's Office, sworn to secrecy, redoubled their efforts to stem the rising tide. By Tuesday, they had come up with plans for a new tax on trust distributions, among other measures, and Mr. Flaherty unveiled them in a surprise Halloween announcement.

While his officials worked frantically behind the scenes, Mr. Flaherty remained characteristically reserved in public.

“We do remain concerned about the issue and continue to monitor the situation,” he told reporters after the BCE announcement, the same answer he had provided a month earlier, when Telus informed the markets it would convert.

Privately, however, his mind was all but made up. He knew that virtually every major company in Canada, from the banks to the insurers to the big oil and gas plays, had begun modelling the trust structure. Some had even informally approached Ottawa about the possibilities for their business, further spooking the Conservative government.

“It was clear from the BCE people that they felt compelled to follow Telus, and that taught us a lesson — quite clearly and dramatically — that if other sectors imitate that sector, we'll see a domino effect,” Mr. Flaherty told The Globe and Mail's editorial board Wednesday.

He declined to identify which companies he expected to embark on a trust conversion, although he acknowledged he had heard of “one or two” in the league of BCE and Telus, and that he had concerns in other sectors such as financial services and energy.

Only last winter, in their campaign platform, the Tories promised to preserve the trust market and not impose any new taxes. Yet as the spate of conversions hurtled toward the $70-billion mark, that resolve began to fade.

The problem, however, was more than merely reversing a campaign pledge: It was avoiding the pitfalls of the former Liberal government, whose handling of the file was besieged by accusations of leaks that are now the subject of an RCMP investigation.

Mr. Flaherty kept the circle of insiders very small in an effort to maintain absolute secrecy, yet there were some hints of what was coming.

A week after BCE announced its planned conversion, the Prime Minister was feted in the oak-panelled dining room of the Toronto Club by deal-maker Tony Fell of RBC Dominion Securities Inc.

As three dozen CEOs sipped their after-dinner coffee, Mr. Harper gave a brief speech on foreign policy. Then Ira Gluskin, a money manager who holds $802-million of trusts, stood up and pointedly asked what the government planned to do with the sector, considering BCE's decision.

“Harper hummed and hawed and basically avoided answering,” said one CEO in the room. “I took it as a sign that this was something the government was worried about.”

The market never caught on. Indeed, Mr. Flaherty's decision was made several weeks ago, with the intervening time spent hammering out last-minute details.

Ottawa felt it could not risk another major conversion and decided to announce its new rules Tuesday — an easy night, as it turns out, to have a caucus meeting and prepare MPs for a possible voter backlash.

In the final hour before markets closed, a group of bureaucrats were glued to their computer screens, scanning stocks for any telltale signs that word had leaked out. They were prepared to take extraordinary steps and pull their announcement if trust units staged suspicious dives, but nothing happened; the markets never suspected a thing, something that was clearly evident when Mr. Flaherty announced the trust crackdown on live television about 5:30 p.m.

For at least an hour, as the information trickled out, confusion reigned. In Toronto, most bankers and CEOs had already left the office and were on their way home to take their children trick-or-treating.

At Telus headquarters in Vancouver, where it was still midafternoon, the reaction was disbelief.

In Montreal, the mood was decidedly more upbeat. Sources said BCE's Mr. Sabia was a reluctant convert to the trust model, and “there was dancing in hallways at Bell” after Ottawa's announcement.

Reaction among foreign investors, who have enjoyed feasting on the uniquely Canadian income-trust offerings, was decidedly negative. Wednesday morning, some U.S. clients of one Canadian trader were describing Mr. Flaherty as the “Chavez of Canada” in reference to the Venezuelan President with a penchant for nationalizing oil plays.

Mr. Flaherty knew it wouldn't be a popular decision in some quarters, but he was hardly exercised. After his announcement, he went straight into a meeting with the Tory caucus and, along with Mr. Harper, informed the group of the new rules.

There was some concern about irate investors, but the reaction was mostly positive, according to people at the meeting.

Afterward, Mr. Flaherty phoned provincial finance ministers in Quebec, Alberta and Ontario to discuss his rationale. The first two were clearly on board, while Ontario was more lukewarm.

“You have to either leave it alone or fix it,” Mr. Flaherty shrugged Wednesday. “We were going to see the two largest telecommunications companies in the country not pay corporate taxes. That's a clear and present danger to fairness in the Canadian tax system. I thought we had to act.”

With a report from Eric Reguly

© Copyright The Globe and Mail

"By the Law of Periodical Repetition, everything which has happened once must happen again and again and again-and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law ..." - Mark Twain

#5 SilentOne



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Posted 07 November 2006 - 11:29 AM

doug, I took a nibble on SND.UN today. Entered on a retest of last week's lows at $5.40. More later. cheers, john
"By the Law of Periodical Repetition, everything which has happened once must happen again and again and again-and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law ..." - Mark Twain

#6 SilentOne



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Posted 08 November 2006 - 08:37 AM

More soundbytes from the Great White North.

By Roger Conrad & David Dittman

Executives of more than 40 energy trusts, whose combined market value was slashed after Jim Flaherty proposed taxing the investment vehicles, said on Monday they want Ottawa to consult with them before imposing changes they said will send investors fleeing and crush the sector's competitiveness.

Flaherty said he was willing to listen to the group’s concerns, but said his mind “will not change.”

The federal Finance Minister admits that although he has received an earful of opposition to his decision to tax income trusts, the government will stick to its policy and put the matter to a vote in Parliament this week. The motion before Parliament will allow the government to collect a tax on income trusts formed after October 31 until formal legislation amends Canadian tax laws. The measure enjoys the support of two opposition parties, the Bloc Quebecois and the New Democrats. The plan imposes taxes on income trusts for the first time and effectively raises dividend tax rates for pension funds and foreign investors that own trusts.

Here’s the simplified optimistic story: The rules appear to be changing, but the game is still the same. The best-run trusts remain an attractive asset class. The tax change is already priced in, and you have a four-year tax holiday.

Meanwhile, good trusts will have plenty of time to adapt to the changes, and a fair number appear to be exempt from Flaherty’s moves altogether. Finally, the proposed changes are sparking a takeover wave for Canadian assets, with the likely consequence of sizeable gains for investors.

The S&P/Toronto Stock Exchange (TSX) Composite Index jumped 94.24 points Monday; the TSX's main index has now recovered all its losses from last week after Ottawa announced that it would start taxing income trusts.

The TSX income trust sector was ahead 2 percent Monday but is still down 11 percent from last Tuesday when Ottawa made the announcement after the market close. The 70 trusts in the S&P/TSX Composite Index lost USD19.4 billion in market capitalization last week in the wake of Ottawa's decision to start taxing income trusts.

Is the two-day bounce due to the so-called smart money chasing cheap, potential takeover targets? Canadian Oil Sands Trust advanced amid speculation that the government's plan to tax the entities will spark takeovers. So did Enerplus Resources and several others in a wide range of sectors.

And Macquarie Infrastructure Partners agreed to buy Halterm Income Fund, the operator of a container terminal on Canada's east coast, for about CD172.8 million, or CD19 a unit, in cash. That's about 29 percent more than Halterm's November 3 closing share price of CD14.70.

Bill Gates' Cascade Investments LLC and Prince Alwaleed Bin Talal offered USD82 a share in cash to take Four Seasons Hotels, the manager of 74 luxury properties, private. The bid is 28 percent higher than Four Seasons’ November 3 US closing price of USD63.87.

Private capital managers anticipate more takeouts and privatization. If nothing else, the Four Seasons bid is a reminder that there's still an enormous amount of capital looking for opportunities for privatization. This highlights the most unfair, unintended consequence of Flaherty’s action: It will affect a transfer of the fruits of productive assets from retail investors to financial elites.

Prime Minister Stephen Harper, whose power base is concentrated in the oil-producing West, has often touted Canada as an up-and-coming “energy superpower.” And the Canada story remains about energy, but Ottawa's tax decision puts that in jeopardy.

Oil and gas trusts are unique to other trusts in many regards with the role in the energy sector. Part of the message the Coalition of Canadian Energy Trusts will try to convey is that it's doing a lot of important things for the economy. The coalition will argue that the proposed changes have already hurt its ability to buy and drill oil fields that major oil firms have deemed too small. Trusts have had a positive economic impact because of their investments in drilling, construction, and research and development--during the last five years, trusts in the energy sector have invested CD10 billion in oil and gas development.

The coalition has called for the federal government to consider an exemption for oil and gas trusts, for which the current favorable tax status was first created.

The US experience with flow-through entities--which Flaherty was careful to point out in rationalizing his actions--reveals a much more accommodating framework.

In the US, the business trust structure appeared with publicly traded partnerships (PTPs) that were limited liability partnerships (LLPs) with units that trade on public securities exchanges, combining the tax advantages of partnerships with the liquidity of public companies.

In 1987, conversions numbered more than 100, and Congress estimated that the trend was costing Washington USD245 million a year in lost revenue.

The law that began the taxing of PTPs as corporations was enacted in 1987. However, a PTP that had shares traded before Dec. 12, 1987, was exempt from the law under a grandfather exclusion of 10 years’ duration that was set to expire for tax years beginning after Dec. 31, 1997. The Taxpayer Relief Act of 1997 extended the exclusion, allowing “electing 1987 partnerships” to continue partnership status. This exception is only available to partnerships that qualified under the 1987 grandfather exclusion.

To maintain status as an electing 1987 partnership, the partnership must pay an annual tax of 3.5 percent of its gross income from business activities. The 3.5 percent tax applies at the partnership level and is subject to corporate estimated tax rules.

All PTPs except those categorized as “slow-growth investments” (roughly a third of them) were given 10 years before they'd be taxed as corporations. Most of them converted back as unit prices fell, but the decade-long transition meant fewer sharp losses for investors. Others, such as Cedar Fair, received a special corporate tax rate on the condition that they wouldn't be allowed to diversify outside of their core businesses. Additional rules require any partnership that's publicly traded to receive 90 percent of its income from specified sources. A PTP not meeting this test would be treated as a corporation for tax purposes.

Qualifying income for PTPs includes interest, dividends, real estate rents, gain from the sale or disposition of real property, income and gain from commodities or commodity futures and income and gain from mineral or natural resources activities. Mineral or natural resources activities include exploration, development, production, mining, refining (including fertilizers), marketing and transportation (including pipelines) of oil and gas, minerals, geothermal energy or timber. This means that most PTPs today are in energy, timber or real estate-related (including mortgage securities) businesses.

"By the Law of Periodical Repetition, everything which has happened once must happen again and again and again-and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law ..." - Mark Twain

#7 SilentOne



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Posted 08 November 2006 - 08:46 AM

Natural gas spike seen

Suppliers cutting back: Trust tax change could be factor in pushing up prices

Claudia Cattaneo and Jon Harding, Financial Post
Published: Wednesday, November 08, 2006

CALGARY - Ottawa's trust policy could play an unintended role in boosting natural-gas prices, exacerbating cuts in supplies just as non-trust producers rein in activity.

"It's adding fuel to the fire," said Martin Pelletier, analyst at Canaccord Adams. "Canada may get the tax dollars, but a year later you are going to get a different story when you look at your gas bill."

Natural-gas prices have been weak for almost a year, tempering heating bills, as North American inventories swelled to record highs because of last year's warm winter.

Large producers such as Canadian Natural Resources Ltd., EnCana Corp., Talisman Energy Inc. and Devon Energy Inc. are ruthlessly cutting their drilling programs to help roll back supplies and ease rising oil-field costs.

"The macro picture on natural gas only becomes worse when we hit 2008. We have blown through storage and there is no new gas being brought on because things have been shut in," said George Gosbee, chairman of Tristone Capital Inc. "We'll see US$20 [per million British thermal units] gas prices."

Natural-gas prices fell below US$5 this summer, held down by an uneventful hurricane season in the United States, but rebounded in the past month with the first signs of winter. Yesterday, gas closed at $7.755 in New York. Gas has regained 21% in the past month.

The trust sector, which is focused on natural-gas drilling, says a potential fallout of Ottawa's decision last week to start taxing trusts is that they won't have as much capital available to produce as much gas as they have in the past.

John Langille, vice-chairman of Canadian Natural, which is planning to reduce gas production to 1.6 billion cubic feet a day from 2 bcf/d and cut spending by up to $1.5-billion next year, said prices could spike if the winter is normal or cold.

"It's something that the whole industry is going to have to take into account in the next six months," Mr. Langille told reporters outside a company-sponsored meeting with analysts.

"Right now, we have lots of gas and storage is full. But if we have a cold winter, a lot of gas in storage could be taken out of the system, and yet at the same time everybody has slowed down so dramatically, so the potential is we will have trouble filling that storage back for the fall of 2007."

On the other hand, if the winter is warm and inventories remain bloated into the spring, gas prices could stay weak into 2008, he said.

The Canadian Association of Petroleum Producers was in the throes yesterday of reviewing the sector's capital spending estimates for 2007 to take into account expectations of lower spending from the trust sector, which accounts for up to 20% of Canadian oil and gas production.

Vice-president Greg Stringham said overall spending will likely be lower than the $40-billion to $45-billion previously estimated.

"One thing for sure is that a dollar that goes to the tax side of things - although for the most of these companies it won't happen until 2011 - is a dollar that won't be invested in the ground," he said. "Oil and gas companies are notorious for re-investing immediately what they earn."

Mr. Stringham said many factors could influence gas prices, including how quickly supplies in Canada are phased out, whether U.S. drilling is also restrained, and weather.

"It's not going to be a sudden spike downward in production, like we had with the hurricanes last year," when 20% of U.S. production was turned off. In comparison, Canada's entire exports account for 16% of U.S. supplies.

So far, EnCana has announced a $1-billion cut in spending, Canadian Natural between $1-billion and $1.5-billion, and Talisman Energy is deferring $1-billion, representing almost 10% of the capital spent in Western Canada last year. In addition, companies have been reducing spending on coalbed methane and shallow gas programs.

The trust sector, which spent $5.3-billion this year, may be further hit by not being able to acquire oil and gas properties in the next four years under Ottawa's new rules, bringing into question whether those assets considered marginal will be developed.

Mr. Pelletier estimated that the impact from the announced cutbacks by the three large producers, combined with the potential impact of lower trust spending, will take out at least about 1.6 billion cubic feet a day, or about 10% of Canadian gas supplies.

Another possibility is if Canada's oil and gas trusts spend the next four years developing their assets as fast as possible to take advantage of the tax holiday, which could actually boost supplies, said Mr. Pelletier.



1. Glut of natural gas in the wake of a warm winter forces prices down

2. Big producers cut back because of low prices and higher costs

3. Many small producers forced to cut back as a result of income trust ruling

4. Overall production falls, thereby putting upward pressure on price

© National Post 2006

"By the Law of Periodical Repetition, everything which has happened once must happen again and again and again-and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law ..." - Mark Twain

#8 SilentOne



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Posted 08 November 2006 - 11:06 AM

doug, Doubled SND.UN position this morning. cheers, john
"By the Law of Periodical Repetition, everything which has happened once must happen again and again and again-and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law ..." - Mark Twain

#9 PorkLoin



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Posted 09 November 2006 - 10:17 PM

Hi John.

I'm very happy with all my trust postions as well as basic oil and gas investments. Despite the big NG stocks, price is acting pretty well.

Looking long-term, the Cdn. gov't decision re trusts can only be bullish for energy prices, IMO. Costs for exploration and drilling were already severely on the rise and now a fair bit of the incentive has been cut out from underneath some of those doing it.

Things have been volatile since Hurricane Katrina and "in flux" more than normal, IMO. I think that historically, such big NG stocks have forecasted a rising price within a year or so -- sounds weird but such is life. It may be different this time, and after the past 15 months nothing would surpise me, so I guess I have to say I have no darn idea for 2007.

If nothing else I am mighty patient now, albeit on a "fundamental" basis.



#10 Sentient Being

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Posted 10 November 2006 - 11:52 PM

I was just looking at a chart of IXC, a global energy (a global energy ETF). It looks like a tripple top that has formed across 8 or 9 months. Peaks in April/May, July/August, and November. Would make me wonder about any energy position. Looking at a weekly chart my 21 period MACD has gotten progressively weaker at each peak. So we are now forming a third peak in this energy fund with very divergent weekly MACD.
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