Canadian energy trusts took a hit back in 2006 when the Canadian government decided to effectively end the tax benefits of the income trust structure for most trusts (REITs were spared). However, in 2011, a new version of this old investment vehicle emerged. These new energy income trusts are created to provide investors with oil & natural gas focused yield products and with favorable tax treatment relative to taxable Canadian corporations.
This tax efficient “mutual fund trust” structure is allowed as long as you do not hold Canadian assets; these are not SIFT trusts. Our featured trusts are both lead by Canadian management teams out of Calgary exploiting assets in the US. The new income trusts operate just like the old ones by paying a portion of their cash to unitholders on a monthly basis. This new income play will appeal to yield hungry investors as the yields are very attractive in this low interest rate environment. The downside from earning in US dollars and paying in Canadian dollars is an increase in the payout ratio when the Canadian dollar is stronger. Besides that, yield stocks are a preferred sector to be in when volatility reigns. We expect more trusts to take shape following the same model in 2012.
Eagle Energy Trust EGL-UN.TO $N/A [N/A]
Dividend per Unit: $1.05 per year or $0.0875 per month
Eagle Energy Trust is a light oil producer that pays $1.05 per year in distributions on a monthly basis. A 50% payout ratio is targeted which allows EGL.UN to sustain growth and distribute income. Eagle Energy Trust’s Salt Flat Field is a low risk development play in Texas with a long reserve life index. For 2013, the trust is guiding for an average production of 3,000 bopd (96% oil) and is currently seeking new acquisitions in the US. Eagle Energy Trust enjoys a strong cash flow and liquidity position thanks to its attractive high netback light oil production in Texas which it sells for a slight premium to WTI oil prices. The trust reiterated again for 2013 that its distributions are sustainable.
Parallel Energy Trust PLT-UN.TO $N/A [N/A]
Dividend per Unit: $0.60 per year or $0.05 per month
Parallel is a liquids rich gas weighted energy income trust formed in Q1 of 2011. The company owns a 100% working interest in a liquids-rich natural gas property (West Panhandle field) located in Texas. Parallel estimates its distribution to be approximately 65% income and 35% return of capital for 2011. For 2013 Parallel Energy Trust expects average production between 7,100 and 7,500 boe/d with a 61% weighting to liquids (35% Condensate/65% NGL) and 39% to natural gas. Even though Parallel carries a stigma of being a natural gas trust, more than 80% of its cash flow is linked to WTI pricing since the condensate production sells for 80% of WTI and the NGLs fetch around 50% of WTI. The trust has a long life reserve index of 11.1 years for PDP thanks to a development inventory of 189 wells, more than enough to offset decline and increase production.
The trust units can be held within an RRSP, RPP, RRIF, RESP, RDSP, DPSP or TFSA. For cash distributions received by a Canadian resident individual outside of a registered plan, a percentage of payments are taxable income and the remaining percentage is a return of capital. At the end of the calendar year, the energy trust determines the percentage of the mix for Canadian tax reporting purposes. The cash investors receive are not dividends, they are trust distributions and as such dividend tax credits do not apply. Even though holding your trust units in a registered portfolio saves you from worrying about the complicated tax treatments these distributions receive, it is best to seek advice based on your financial circumstances from an independent investment or tax advisor. Finally, please keep in mind that these trusts have no obligation to distribute any fixed amount, and reduction in, or suspensions of cash distributions may reduce future yield.
Disclaimer: the information presented above is only for informative purposes; it’s meant to serve as a starting point to carry your own due diligence. It is in no way an encouragement to buy or sell the aforementioned securities. If you find any errors in the data please do not hesitate to contact us.