Canadian Energy Trusts
A Introduction to Canadian Energy Trust Funds
Canadian Energy Trusts
Canadian Income Trusts
Canadian Royalty Trusts
Canadian Oil Trusts
In a Canadian energy trust, the underlying asset is acquired by the operating
company, typically using a combination of third party debt and funds received
from the Canadian energy trust (through equity offerings and/or its own third
party debt), in exchange for the grant of royalties, debt and shares. Net
operating cash flow, generated from the sale of crude oil, natural gas and NGLs
produced and other services provided, is passed on to the Canadian energy trust
as distributable cash flow through a combination of payments under the
royalties, interest and principal on the debt and dividends or capital repayment
under the shares.
Distributable cash flow is available to unit holders, net of operating expenses,
general and administrative expenses, capital expenditures, debt service and
management fees. As Canadian energy trusts tend to have little or no taxable
income at the corporate level, distributions paid from the trust structure tend
to be higher than dividends received from comparable common equities.
Canadian energy trusts do not have high retained earnings, as a substantial
majority of operating cash flow is paid to unit holders. Therefore, a credit
facility is established in order to fund, among other things, future
acquisitions and development programs. To pay down debt, equity offerings are
made periodically, having regard to the debt position from time to time and
prevailing market conditions.
Typically, the assets that are suitable for Canadian energy trusts are
mature, low exploration-risk properties and toll-based energy infrastructure
with predictable operational profiles and minimal or low capital expenditure
requirements. In the case of oil and gas properties, drilling tends to be
in-fill or other relatively low-risk projects, generally resulting in higher
drilling success rates than those experienced by conventional exploration and
Different from U.S.-based royalty trusts (which are legally precluded from
making acquisitions financed by new debt and/or equity and, therefore, cannot as
readily replace depleted reserves), Canadian energy trusts have managed, during
certain extended periods, to actually increase per trust unit production,
discounted cash flow value and distributions, in addition to maintaining
reasonable monthly or quarterly distributions on the trust units. The ability to
acquire assets and finance them with new equity, combined with a tax-efficient
structure, leads to a financial vehicle that is radically different from its
Whereas the substantial component of U.S. royalty trust assets are actually
overriding royalty interests, the vast majority of Canadian energy trust assets
are operated and non-operated working interests. In this sense, Canadian energy
trusts are more similar to conventional oil and gas production companies (albeit
with no higher-risk exploration activities) than U.S. royalty trusts, which in
many instances can be more accurately characterized as financially structured
derivative instruments to oil and gas assets.
Canadian energy trusts appear to offer a somewhat higher yield than their U.S.
counterparts, which may, in part, reflect the overriding royalty nature of the
U.S. royalty trusts’ cash flows (and, therefore, lower operating leverage and
capital requirements). The U.S. royalty trusts typically have no debt,
reflecting the blow-down character of their assets and operations and the
absence of acquisition activity. Meanwhile, Canadian energy trusts do carry some
debt, reflecting previous acquisition activity and development capital, which
are typically funded, in whole or in part, with debt.
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