More distribution cuts likely for energy trusts
VIRGINIA GALT
Thursday, February 01, 2007
January was a busy month for distribution cuts in the capital-intensive energy trust sector, and more are likely on the way, according to a research report issued Thursday by Canaccord Adams.
Lower commodity prices and federal government plans to end the tax advantage enjoyed by income trusts have forced several energy trusts to slash distributions to unit holders in recent weeks.
“We expect further distribution cuts to be announced through the upcoming financial reporting season,” the Canaccord Adams analysts said in a report to clients, as the federal finance committee continued its hearings into the proposed tax on income trusts.
“We continue to view Thunder and Pengrowth as possible contenders for distribution cuts, as well as Provident, given the recent weakening in oil price under NYMEX forward strip pricing for 2007.”
Natural gas prices also took a further dip Thursday, falling 4.1 per cent to $7.350 (U.S.) per 1,000 cubic feet in mid-day trading on the New York Mercantile Exchange because of larger-than-expected underground supplies.
With lower commodity prices and the need to spend on production, distribution cuts to unit-holders were inevitable, analysts say.
“Given that January has been a busy month for distribution cuts, we have updated our distribution scorecard,” Canaccord said in its research report. Those with the highest payout ratios are the most vulnerable, the firm said.
In the past month, distribution cuts have been announced by a number of trusts on Canaccord's coverage list: “Canetic (17 per cent cut), Daylight (23 per cent cut), Focus (12.5 per cent cut), Progress (29 per cent cut), Trilogy (35 per cent cut), and True (as part of their announced restructuring, True announced that it will pay a dividend of $0.02 per month, compared with $0.12 per unit currently),” the firm reported.
Distribution cuts have also been announced by BlackWatch Energy Services Trust, Terravest Income Fund, Precision Drilling Trust, Enterra Energy Trust, Advantage Energy Income Fund and Shingingbank Energy Income Fund.
Canaccord also expects to see consolidation in the sector this year.
“We view Thunder, True, and Vault . . .as consolidation targets as these names are trading at or below where we think property prices will be,” the Canaccord analysts wrote in a report to clients.
