Canadian Royalty Trusts
A Introduction to Canadian Royalty Trust Stocks

Also see

Canadian Royalty Trusts
Canadian Royalty Trust - Coal Resources

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 important considerations.

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 reserves.

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.

Please visit below for an excellent report on Canadian Royalty Trusts.