TORONTO/CALGARY - Billions of dollars of natural gas assets in Western Canada could change hands this year as energy income trusts convert into corporations and raise capital for acquisitions, bankers and portfolio managers say.
Canada's trusts lose their favored tax status in just 12 months, so they are shifting away from strategies aimed at paying their investors large sums of cash. Instead they now are looking promote production and share-price growth.
The year's first major energy-sector financing highlights the shift. ARC Energy Trust (AET_u.TO) raised a greater-than-expected C$252 million ($242 million) in an equity offering this week to pay for natural gas assets.
Management of these companies need to change their focus from one of 'let me get cash flow and distribute it to my unit holders,' to 'I'm going to get cash flow and use it to grow shareholder value,' said Tim Logan, a portfolio manager for Cockfield Porretti Cunningham in Toronto.
Income trusts that can best shift from harvest mode to growth mode will outperform.
Trusts are converting back to corporations at the same time the energy sector is rebounding, and they are feasting on assets being auctioned off by large companies looking to streamline operations. Most prominently, Suncor Energy Inc (SU.TO) is looking to unload up to C$4 billion of assets it acquired in its takeover of Petro-Canada last year.
REBIRTH OF THE MID-SIZED PRODUCERS
The trend represents a rebirth of the mid-size, or intermediate, oil and gas producer group that had been fodder for trust conversion in the 1990s and early this decade.
The trusts have been busy doing acquisitions. They have become Canada's intermediate oil and gas companies or businesses, said Dirk Lever, managing director and head of North American Equity Energy Sales for RBC Capital Markets.
By Lever's count, there are 14 oil and gas income trusts like ARC -- many of them well-run, viable businesses -- that will convert to corporations by the end of this year as part of new regulations.
He sees C$4 billion to C$6 billion of unconventional natural gas assets, like shale plays, going on the block in Canada in the next year 12 months. Oil and oil sands assets could fetch another C$4 billion to C$5 billion.
ARC paid about C$180 million in December for a general partnership in gas assets in Canada's Ante Creek region, boosting output and adding reserves and exploration lands near its own holdings.
The assets are in the Montney in the Rocky Mountain foothills straddling Alberta and British Colombia, one of Canada's major unconventional gas plays.
The energy sector had embraced the income trust model as investors sought high yields and Western Canada's conventional oil and gas properties matured. Under the structure, trusts paid out the bulk of their cash to unitholders. The holders were responsible for paying most of the corporate taxes, but they could be deferred in retirement savings plans.
But in 2006, Prime Minister Stephen Harper's government, fearing the loss of billions of dollars in revenue, said trusts would lose their tax-favored status starting in 2011.
Enerplus Resources Fund (ERF_u.TO), which pioneered the Canadian energy trust model more than two decades ago, and Bonavista Energy Trust (BNP_u.TO), are considered likely players as the asset shuffle develops.
Both made sizable natural gas asset acquisitions in 2009, although Enerplus' big buy was in the red-hot Marcellus Shale gas play in the U.S. Northeast.
Industry observers say trusts will vie to acquire junior oil companies, as well as assets offered by large players. Suncor, for example, now has Alberta and British Columbia gas assets producing 60,000 barrels of oil equivalent a day on the block.
Cenovus Energy Inc (CVE.TO), the oil sands company spun off by EnCana Corp (ECA.TO) last year, has said it aims to sell C$500 million of assets annually over the next few years.
If there are a lot of assets for sale, somebody is going to buy them and whoever buys them is probably going to have to raise some capital, said Lever, adding that financing for deals would probably come from a combination of debt and equity.
RBC, a unit of the Royal Bank of Canada (RY.TO) and the country's top adviser on mergers and acquisitions last year, led a syndicate of North American banks on the ARC Energy deal, which was originally slated to bring in only C$200 million.
(Editing by Frank McGurty)