Canadian Royalty Trusts
A Introduction to Canadian Royalty Trust Stocks
Canadian Royalty Trusts
Canadian Royalty Trust - Coal
Canadian royalty trusts tend to be energy related. The first Canadian
royalty trusts participated in conventional oil and gas producing wells. Newer
Canadian royalty rusts focus on synthetic oil, coal, and iron ore. Because
of their special tax status, they pay out a large percentage of their cash flow
to shareholders (unit-holders) in the form of monthly dividends (distributions).
Although many Canadian royalty trusts have in-house exploration and development
capabilities, most grow primarily by acquiring additional operating companies.
In terms of structure, a Canadian royalty trust typically controls an operating
company, which purchases oil and gas properties using the trust’s capital. The
trust then receives royalty and/or interest payments from its operating company.
Investors in Canadian royalty trusts get cash distributions because, through
the trust, they own producing resources. The distributions are higher because
Canadian royalty trusts focus on production and minimize explorations costs and
capital expenditures. The distributions are often largely tax deferred because
of depletion allowances.
Therefore, much of each distribution reduces the cost base of the units, rather
than being currently taxable. In essence, a portion is considered return of
capital. The other good aspect of them is that they are fairly liquid, being
listed on a stock exchange, and traded like stocks.
Now for the risks. All Canadian royalty trusts produce from a depleting asset
base. So the proven reserve life as well as future costs of production are
Generally, conventional oil & gas Trusts have the shortest life reserves. If
they are to stay in business, they must reinvest some of the cash flow in
exploration or in purchasing new property. Depletion risk is less serious for
synthetic oil, iron ore, and coal. These usually have 30 or more years of
The price of the units depend on the prices of the underlying commodity.
Whenever revenues decline, distributions will fall. In the 80's, the prices of
oil & gas trusts fell by over 50%, when the expected increases in hydrocarbon
prices didn't happen.
Since Canadian royalty trusts are sold on a yield basis, they are also sensitive
to the general level of interest rates. Overall then, you have to look at these
things very carefully, and do a lot of analysis before you jump in. There are
some good ones, and there are bad.
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