Tuesday, December 19, 2006

Canadian Royalty Trusts versus American Royalty Trusts

Investors have been looking at Canadian Royalty Trusts for their high income. These trusts pass through all their earnings from oil and gas wells to the trust holders, similar to the way that real estate investment trusts handle their payouts. Because the entity is set up as a trust instead of a corporation, there is no taxation at the corporate level. In addition, a large part of the dividends are non-taxable due to depletion and depreciation deductions.
Unfortunately, the Canadian government came out with a plan to tax all Canadian trusts at the corporate level beginning in the year 2011. This caused all Canadian trusts to suffer a severe drop during the month of November, which in turn gave the trusts a higher yield. Although they have recovered slightly and therefore have somewhat lower yields, the average trust yield from Canada is still significantly higher than the U.S. royalty trusts.
Below is a list of the Canadian Royalty Trusts that are traded on American stock exchanges (there are many more that are just traded on the Toronto Stock Exchange). Also is a list of American Oil and Gas Trusts, an Iron Ore Royalty Trust, and a European Royalty Trust.

CANADIAN OIL ROYALTY TRUSTS
(traded on U. S. Exchanges)

Advantage Energy Income (AAV) 18.5%
Enterra Energy (ENT) 17.6%
Canetic Resources (CNE) 17.4%
Harvest Energy (HTE) 17.3%
Pengrowth Energy (PGH) 15.0%
Precision Drilling (PDS) 13.3%
PrimeWest Energy Trust (PWI) 12.4%
Penn West Energy Trust (PWE) 11.3%
Provident Energy Trust (PVX) 11.2%
Baytex Energy (BTE) 9.6%
Enerplus Resources Fund (ERF) 9.4%

AMERICAN OIL & GAS ROYALTY TRUSTS

Santa Fe Energy Trust (SFF) 13.20%
LL&E Royalty Trust (LRT) 6.6%
Permian Basin Royalty Trust (PBT) 7.00%
Sabine Royalty Trust (SBR) 5.1%
Marine Petroleum Trust (MARPS) 9.9%
Dominion Resources Black Warrior Trust (DOM) 9.8%
Hugoton Royalty Trust (HGT) 6.2%
Mesa Royalty Trust (MTR) 2.3%
BP Prudhoe Bay Royalty Trust (BPT) 8.8%
Williams Coal Seam Gas Royalty Trust (WTU) 9.5%

AMERICAN IRON ORE ROYALTY TRUST
Mesabi Trust (MSB) 9.00%

GERMANY ROYALTY TRUST
North European Oil Royalty Trust (NRT) 8.2%

6 comments:

One Guy said...

Nice list to peruse -- keep in mind that the trusts are very different, the US trusts are closed-ended ones, as soon as the resource they are depleting is gone the trust units are worthless, so you have to figure out how many years of that yield are available before the price declines to near zero (the US trusts with high yields have shorter usable lifespans, in general).

Canadian trusts, in contrast, can continue buying up new properties to add to their reserves -- which means they make secondary offerings to raise the cash, but if they are good at buying at opportune times they can keep the yield train running ad infinitum.

Cheers,

Travis
oneguysinvestments.com

Steve said...

The Best deal going right now is AAV. It's just above it's 52 week low and oil and gas prices coming back up from a 20 month low this one will be on the climb. There's also talk now of the Canadian Government grandfathering existing trust such that they would not suffer the tax or pushing the tax off 10 year, or not doing the tax at all. It seems the finance minister is catching a lot of grief from the retired folks up there who depend on the trust. And just as it is in the states they vote.

M. Lee said...

Devon Energy Corp continues to show their total disregard today (12 March 2007) with their continued destruction of Unit Holder's equity, by this crazy but ruinous statement that they “believes it may have overpaid the trust . . .” yet in the next breath state they have no reliable estimates, making this all guesswork. I’d say this all smacks of rot in the boardroom of Devon in their efforts to unwind the trust for pennies on the dollar. Unit holders unite!

Gordon said...

Taking a look at the Hugoton Royalty Trust in Oklahoma/Texas, their Annual Report says that the estimated future net distributable income for their proven reserves is $639 million. Thats $15.97 for each of the 40,000,000 units. Why would the market value this trust at $27.20 per unit? I'm either missing something or this is a sure-fire opportunity to lose money.

pzwong said...

I don't really understand why the new Canadian tax should have such a big effect on the stock price. We do get a foreign tax credit. So whatver we pay Canada goes into reducing our tax in the US. They more or less balance out. All that happens is Canada will take some tax money away from the US Treasury. The tax rates in the two countries are not going to be exactly the same, but it's generally not that big a deal. So I don't see why the stock price should go down by 30% or more. Of course one should be careful about not holding these stocks in IRS or other nontaxable accounts, simply because we can't claim any tax credits when the tax rate is 0%.

luannewolf said...

My question is about the foreign tax credit (Form 1116). IRS publication 514 says you can't take a foreign tax credit on foreign oil related income or on foreign oil and gas extraction income. Doesn't PGH fall within this group?

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