For the first time in more than four years, a new trust has launched on Canadian markets with a novel corporate structure that its founders believe can serve as a fresh template for the oil and gas sector.
Eagle Energy Trust has been created to take advantage of an exception in the new rules for trusts that allows them to avoid punitive taxes by holding only foreign assets.
While the new company will be headquartered in Calgary, its sole asset is an interest in a Texas oil field, which is currently producing 900 barrels a day. But Eagle believes it can quickly increase production, hitting 1,200 barrels a day by year's end.
The promise of a 50-per-cent projected payout ratio - with all of the tax advantages of a trust - proved attractive enough to investors that Eagle raised $150-million in its initial public offering. Its units began trading Wednesday and closed at $10.01, a penny above the IPO price.
"There's lots of ways for us, as people in the oil patch, to make money, but I felt very strongly that the average mom-and-pop retail investor needed a replacement for that yield product," said Richard Clark, chief executive officer of Eagle Energy, and a corporate finance lawyer with a long history in income trusts.
"We think we've demonstrated some vision in being the first new trust created since the trust announcement [of 2006]"
The number of energy trusts has fallen dramatically since Oct. 31, 2006, when the federal government announced a 34-per-cent new tax on trust distributions. At that time, the Toronto Stock Exchange boasted 32 energy trusts with a combined market capitalization of $83.9-billion. In four years, that shrank to 13 with a total value of $57.2-billion, creating what Mr. Clark called a substantial vacuum for investors searching for yield. (The gap is even wider for all Canadian trusts, which have tumbled from $209-billion in value to $140-billion.)
"I think that people were [historically]happy with the trust performance and what they got out of it," Mr. Clark said. "In an interest rate environment where you might get 1.5 per cent on your money, we think we'll be attractive."
The idea has attracted substantial interest in Calgary, where the decline of the trust has made it more difficult to sustain intermediate-sized companies. Still, it's not clear how many will follow in Eagle's footsteps - or how fast.
Even the old-style energy trust model took nearly a decade before it started to gain broad acceptance, and that was with companies that were able to work on home turf. Forcing companies to operate exclusively abroad could be a challenge few are willing to confront.
"Will it result in hundreds of new trusts coming forth? It's hard to say, because you do have to own assets and operate assets in a foreign jurisdiction - which means you actually have to conduct business down there," said Kent Kufeldt, a corporate and securities lawyer with Macleod Dixon. "And there's always additional risks and complications that come from operating in a foreign country."
Even companies that attempt to follow in Eagle's footsteps may have a hard time finding the right kind of oil assets to sustain the business model.
"I can't imagine these things growing as big as some of the [old]Canadian trusts," said John Brussa, a Calgary tax lawyer and one of the fathers of the pre-2006 trust structure.
"The [oil-and-gas]property market in the U.S., in my experience, isn't as well developed as it is here. Properties don't trade nearly as much."
On the other hand, he said, "maybe they don't trade as much because there aren't as many companies to buy them and finance them. Maybe this could be the wave of the future."
Either way, those in the industry say it will be difficult for Eagle to maintain the 10.5-per-cent distribution return it is currently expecting.
Mr. Clark believes Canadians have an advantage when they operate in the United States, since smaller energy companies can get access to capital more cheaply in Canada than south of the border.
"We think we have a tremendous first-mover opportunity," he said. "I think we can grow this thing to be a multibillion-dollar-sized asset. And we're going to move aggressively to do that."