Aspen Group Resources (ASRPF)

[Amaunet]

A New RIT

I have read very little regarding these but they might be able to solve all of our problems. See what you think. Am

Given that-

Public companies are having a very difficult time of it.

Private companies move faster than publicly traded E&P firms in acquisitions and divestitures.

The financial environment for the broad energy industry is bad, liquidity is drying up, access to capital is drying up, and a number of companies are having difficulty rolling over credit lines.

It will be the royalty trusts that will be the dominant force among buyers. They are really the only vehicles around that can raise money.

The oil and gas sector is going to be attractive for some time and royalty trusts are a little less volatile than the pure oil and gas producers because they have such large distributions to share holders and yield helps keep the share prices a little more stable.

This is beautiful!!!

Here is a new kind of royalty trust using a revised management structure for RITs which aligns the interests of management with unitholders, and reduces the conflicts with investors which can arise when a fee is paid to a separate management company. In addition, the new trusts have a competitive advantage over existing trusts in the capital markets, as their costs are less and unitholders get more income.

Part of the reason a company would use a self-management structure is that it has shareholders which own a significant amount of the outstanding stock.

Approximately 60% of Aspen’s shares are held by insiders or are shares that are closely held.


Sayer's Corporate Finance
Viewpoint (page 1/3)
An Oil Industry Newsletter
Spring 2002

RITS' MANAGEMENT FEES

Three new royalty income trusts (RITs) are about to be created in the oil and gas industry, and each will be part of a new trend among trusts to eliminate management fees. This approach will help to fuel the popularity of RITs among investors, and will put pressure on existing trusts to change their cost structures.

Paramount Resources Limited announced on May 12, 2002 that it plans to create a sizable RIT through a special dividend of trust units to its existing investors. The new trust will hold substantially all of Paramount’s northeast Alberta natural gas assets, with gas production of approximately 100 mmcf/d and over 500,000 net acres of undeveloped land. It will be managed by existing Paramount employees, with no third party management company and without associated management fees.

The other two companies moving into a RIT structure are Parkland Industries Ltd., announced on April 29, 2002, and Canadian Crude Separators Inc. (CCS), announced on March 15, 2002. Parkland is a retail and wholesale marketer of transportation fuel, and had operating revenues of $494 million in its last fiscal year ended June 30, 2001. Parkland’s management structure will be similar to Paramount’s new trust, since the operations of the business will be conducted by existing employees and no management fees will be payable for this service.

CCS provides services to the upstream oil and gas sector through its Treatment, Recovery and Disposal Division, and its Well Servicing Division. Together, the two divisions had revenues of approximately $111 million for the year ended December 31, 2001. Shareholders approved the conversion into a RIT on May 22, and CCS Trust and its operating company will be managed in a similar fashion to Parkland.

Under the fee system for most existing conventional oil and gas RITs, costs for management contracts consist of a percentage of net operating income (usually defined as revenue less royalties less operating costs), plus a fee on acquisitions or divestitures by the fund. In 2001 these fees ranged from 3% to 9% of net operating income, with 7% being typical. In the case of Paramount’s new RIT, the elimination of a 7% management fee to a third party saves investors an estimated $7.7 million in cash flow per year.

Part of the reason these three entities are using a self-management structure is that each has shareholders which own a significant amount of the outstanding stock. In the case of Paramount, management and directors own more than 50% of the common shares, most of which are held by its President and Chief Executive Officer, Clay Riddell. Parkland directors and senior officers own approximately 33% of the company’s stock, and at CCS, David Werklund, President and Chief Executive Officer, owns 51%.

This revised management structure for RITs aligns the interests of management with unitholders, and reduces the conflicts with investors which can arise when a fee is paid to a separate management company. In addition, the new trusts have a competitive advantage over existing trusts in the capital markets, as their costs are less and unitholders get more income.

The immediate popularity with investors of the decision to reorganize into a RIT is shown by the increase in the three companies’ share prices after the announcements. Paramount’s stock increased to $15.20 on the day after the press release, up 11% from $13.65 on the day prior to the announcement. Parkland’s share price increased 26%, and CCS got a similar response with a 17% jump.

The attractiveness of the RIT structure to a broad cross-section of the Canadian oil industry is partly due to the high “yield” compared to investors’ other alternatives. The largest five conventional producing trusts currently yield between 12% and 18%, and a 10-year Government of Canada Bond is about 5.5%. While a trust’s “yield” is different from a bond’s “yield”, the huge difference in income to investors blurs the distinction.

This popularity with investors gives trusts a competitive advantage over normal exploration and production companies in financings and in acquisitions. RITs completed $1.4 billion in financings in 2001, up 72% from 2000, and they closed $2 billion in acquisitions and $4 billion in mergers during last year. This competitive advantage allows them to grow faster, and last longer, than they would if they continued in a corporate form.

In the past, support for RITs in the capital markets has come nearly entirely from retail investors. Management fees have been one reason that institutional investors have been reluctant to participate. However, as more RITs turn toward the new self-managed structure, institutions may get more willing to invest, setting off a further expansion of activity in the oil and gas RIT sector.



Reference:

http://www.sayersecurities.com/viewpoint.html

http://www.investorshub.com/boards/read_msg.asp?message_id=257944

http://www.investorshub.com/boards/read_msg.asp?message_id=352623

http://www.investorshub.com/boards/read_msg.asp?message_id=498413

http://www.investorshub.com/boards/read_msg.asp?message_id=349810