Oil and Gas Income Trusts
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The most controversial of income trusts are the royalty trusts which invest in mining or oil and gas properties. The reason is that mines and oil and gas wells have limited lifespans. They eventually run out of oil or gas or coal or whatever.
Because of this, these trusts must periodically have a new public offering of shares to finance the purchase of additional properties, or they must wind up at some point, liquidating remaining assets and distributing the proceeds to the unitholders.
They are also subject to the vagaries of the commodity markets. Oil goes up. Profits go up. Distributions go up. And vice versa. Right now (January 2001) the oil and gas trusts are riding high with excellent yields and rising unit prices - the best of both worlds. But if oil prices head south again, the distributions will shrink and the share prices will drop.
An interesting example is NCE Petrofund which has been around since 1996. A look at its distributions and share price shows that as the price of oil dropped, the unit price dropped from a month end high of $6.55 on Sept. 30, 1996 to a low of $2.07 on Nov. 30, 1997 while distributions dropped from a high of $0.08 a share to a low of $0.03 a share. The shares still have not regained their past highs, but the distributions soared to a high of $0.14 in January 2001 as oil prices recovered.
Current yield on the trust is 28.5% (based on the most recent distribution at the price on the day it was announced). But even at $2.07 with a distribution of $0.03, the yield was 17.4%. I did a calculation on the return of Petrofund over the years if distributions were regularly re-invested and discovered that from 1996 to present, the return was 19.4% annually. Most trusts have DRIP programs so distributions can be re-invested.
What happens when the oil runs out? At the recent Vancouver Venture Investment Conference I asked Steve King, editor of the PetroDispatch newsletter (available free at Stockscape.com) what he thinks of oil and gas income trusts and he did not think much of them for that reason. He questioned how the trusts could make such distributions.
But I also paid a visit to NCE's booth and asked their spokesman to explain what Petrofund did to maintain reserves and avoid winding down. He explained that the company has a new public offering periodically to finance the purchase of additional properties.
I asked whether this wouldn't dilute the unitholder's interest and he replied that it depended on how good a job the company did in its buying. They try and purchase properties that other companies want to get rid of for one reason or another at about $6.50 - $7.00 per barrel of reserves. Such bargains are, apparently, available if you know how to find them.
One of the great appeals of Oil and Gas Trusts is that much, and sometimes all, of the distribution is tax free because of flow-through depletion allowances and other deductions. But the base price for the trust unit is adjusted downwards as well, so there is a larger capital gain when the units are sold, if the units hold their price.
I've done up a table of Energy Income Trusts which you'll find linked in the box above right. It includes a link to a brief description at Investcom.com, the symbol, the distribution frequency, the most recent date on which a distribution was declared, the distribution date, the record date (distributions are made to holders of units on the date of record), the amount of the distribution, the price of the trust units on the day the distribution was announced, and the yield based on the distribution and price.
Yields vary from 0.0% for the Luscar Coal Income Fund to a high of 30.5% for the APF Energy Trust.
Disclosure: This writer owns shares of both Petrofund and APF Energy Trust.
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