Three U.S.-based energy trusts have gone public in Canada since 2010, raising over $700-million.Denny Thurston/Getty Images/iStockphoto
The energy trusts that went public after the financial crisis are scrambling to adopt new investment strategies, and one is especially keen on investing at home.
Four years after going public, Eagle Energy Trust is asking shareholders for the right to invest in Canadian energy assets – a shift that would radically change its mandate.
Eagle, much like its peers Parallel Energy Trust and Argent Energy Trust, was created to take advantage of a loophole in the tax code. So long as these companies owned U.S. assets, they were allowed to pay out most of their cash flow to investors as distributions – much like the old income trusts.
Yet these trusts suffered over the past few years, with Eagle losing more than half of its value since its initial public offering. In the face of a North American energy market that looks much different from when they went public, Richard Clark, Eagle's chief executive officer, argues a new investment strategy is necessary.
When the trusts were first set up, Mr. Clark said, the cost of capital was lower in Canada, while operational costs were lower in the U.S. That helped these firms raise money here, and then invest it south of the border. Today, he argues, the situation is reversed.
Because U.S. operating costs have popped, Eagle went so far as to sell its properties in the popular Permian Basin for $140-million (U.S.) in August. "The capital required to execute this play has… risen substantially, making it unsuitable for development within acceptable leverage parameters for the trust," Eagle said at the time.
After the sale, the company has $55-million in cash and a $55-million debt facility at its disposal, and Mr. Clark now wants to deploy them at home. (The company is based in Calgary.) In part, this is because of the shift in costs on both sides of the border. But it also stems from "the demise of the 'small cap' public company" in Canada, Mr. Clark said.
Historically, he argued, small public energy companies could get up and running with a few hundred thousand dollars. In today's markets, companies need tens of millions to drill, if not more. As a result, there are scores of small firms stuck in a rut because they have no more cash – leaving investors with no exit plan. A company like Eagle, could come in and buy up these assets, Mr. Clark argues, because it has funds readily available to take the development to the next stage.
However smart that strategy may seem, it also flies in the face of Eagle's initial plans to re-create a trust market. And while the new plan could offer up some cash flow to be paid out to investors, Canadian tax laws would require these payments to be made as dividends or return of capital – making the energy trust look more like a dividend-paying corporation, or "divco."
Mr. Clark argues that the company will still be a trust, because he will still search for U.S. assets. Ideally the company will have a mix of American and Canadian developments – meaning investors will get two types of payouts, trust distributions from the U.S. assets and dividends from the Canadian assets. But first he needs shareholder approval, and winning over investors who thought they were buying a pure play trust model may not be so easy.
Tim Kiladze