Many investors would be surprised to learn
from which country the United States imports the greatest
amount of oil.
It's not Saudi Arabia. It's not Russia. And while Venezuela
is high on the list, it's not that nation either. The answer
In all, the United States imports about two million barrels
per day from its neighbor.
Much of that oil comes from Canadian trusts like Penn
West (NYSE: PWE) and Enerplus (NYSE: ERF), which
are based right here in my home city of Calgary, Alberta.
trust model makes sense for Canadian energy producers with
mature reserves that generate predictable cash flow. The oil
and natural gas reserves offer up plenty of cash to pay
investors. Meanwhile, trust rules mean that the business has
to pass along the bulk of cash flow to investors. The result
is high yields that attract shareholders and boost the share
It was a win-win: The trust enjoyed high-priced
equity capital to finance growth, and investors received
superior income taxable at the reduced dividend rate in the
U.S. (Canadian investors also had it good; they could defer
taxes by placing trust units in a registered retirement
But the party was too good to last. In a few months, these
trusts will no longer exist in their current form. Fearing
the loss of billions of dollars in tax revenue, the Canadian
government announced on October 31, 2006 that trusts would
lose their tax-favored status starting on January 1, 2011.
The proposal was known here in Calgary as the "Halloween
Massacre," and the Canadian "Oil Patch" lobbied hard to beat
it down, but was unsuccessful.
Fearing the end of double-digit yields and tax-advantaged
income, investors on both sides of the border dumped their
units in droves. Trusts lost more than -30% of their value
in the weeks following Prime Minister Harper's initial
What's Next for Canadian Income Trusts?
The uncertainty of what will happen next has continued to
weigh on trusts. Most will convert over to ordinary
corporations, but which ones? Which will get taken over?
Which will cut their payouts to conserve cash and focus on
production growth? Which will keep paying dividends at the
Now the clouds are starting to clear. According to Canadian
investment dealer RBC Dominion, as of late in the first
quarter, 72 income trusts had been acquired at an average
premium of +14% above their trading price. Another 40 had
converted to dividend-paying corporations.
And a survey by BarnesMcInerney showed that 84% of the 165
Canadian income trust CEOs polled expect to cut cash
distributions when they convert trusts into traditional
corporations. But all is not doom and gloom. Yes, some are
cutting payments, but others are saying they will maintain
the current rate if they have the cash flow.
To provide the greatest benefit to investors, I've taken a
look at what's ahead for three of the most popular Canadian
trusts. Keep in mind that the situation is still fluid --
while this information is accurate as of now, you'll still
want to double-check with the company's Investor Relations
department just to make sure. We've included the contact
information for each entity below.
Penn West (NYSE: PWE)
Penn West is a top producer of crude oil and gas in western
Canada. The company produced about 175,000 barrels per day
in 2009, with 60% coming from oil and 40% coming from gas.
The outlook for the distribution from Penn West (NYSE: PWE)
does not look promising, given that in years past the trust
was heavily focused just on payments. The trust has said
that it will convert to a corporation around January 1, 2011
and put more emphasis on growth. At that time, it's likely
that payments will be cut. "As a corporation, Penn West will
focus on total shareholder return. This will consist of both
growth and income from dividends," CEO William Andrews said
in a recent earnings report.
Leanne Murphy, an Investor Relations representative at the
company, elaborated on Penn West's new growth/income
business model. "Management has said that they would like to
see a total return for investors [per year] in the +8-10%
range. At this time, we are most likely looking at a growth
portion in the +3-4% range and an income portion in the 5-6%
range," she said. She added that more information will be
forthcoming as the company moves closer to the conversion
Penn West can be reached at 888-770-2633 or by emailing
Enerplus (NYSE: ERF)
Established in 1986, Enerplus is one of Canada's oldest and
largest independent oil and gas producers. In 2009, the
company produced nearly 90,000 barrels of oil equivalent (BOE)
each day, with 59% coming from natural gas.
The company has already begun investing in early-stage
resource plays as it moves toward converting into a growth
and income corporation, which will take place around January
Enerplus has stressed its commitment to distributing "a
significant portion" of cash flow to shareholders after
converting to a corporation. Tax pools, basically credits
that protect future earnings from being taxed, of about $3
billion provide "shelter from cash taxes in Canada for three
to five years beyond 2010," management said. Distributions
will vary with cash flow, management added, but payments
won't need to be adjusted "as a result of" converting to a
We spoke with Garth Doll, an Investor Relations
representative at Enerplus. He said that if cash flow
remains the same, the current dividend will remain the same.
But the growth aspect of the company will require cash, so
future cash flow increases will largely go to reinvestment,
not distribution increases. "In total, the company is
looking for a +10-15% total return to investors," he said,
"but no yield target has been given."
For questions, you can contact Enerplus at 403-869-1950
Provident (NYSE: PVX)
Provident is a Calgary-based Canadian trust that is now a
pure-play midstream business, specializing in natural gas
liquids (NGL). Provident recently spun off its upstream
business and merged it with Midnight Oil Explorations in a
deal worth C$460 million to Provident. In 2009, the
midstream business contributed about 60% of the trusts funds
Provident has stated in a news release that the deal will
"enable Provident Midstream to continue as a pure play,
cash-distributing natural gas liquids (NGL) infrastructure
and services business." The company also said that it will
maintain its current distribution through 2010. Provident
has some $1.4 billion of tax pools available, which "will
provide shelter for a portion of taxable income beyond
Heidi Vandeveen, an Investor Relations representative at
Provident, told us that the company intends to be a
cash-distributing corporation but added that these plans are
not definite. "The distribution policy is under review as
our Board looks at the plan to convert to a corporation,"
she said. "We hope to have more information available to
unitholders in the fall regarding this."
You can reach Provident at 403-231-6710 or
There's no doubt the new tax laws will have a big impact on
trusts, but right now it still appears there will be solid
(albeit lower) yields in the sector. I'm keeping a close
watch on these three trusts -- as well as many others -- for
subscribers of my
newsletter. If you have interest in Canadian trusts
-- or simply earning a higher income stream and
having foreign exposure --
follow this link to learn more about this
Carla Pasternak's Dividend Opportunities
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