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Energy trusts

Baytex hike unlikey to spark trend Add to ...

The surprise distribution hike by Baytex Energy Trust likely won't be matched by most Canadian energy trusts as they ready their balance sheets for pending corporate conversions and cope with depressed natural gas prices.

Baytex delighted yield-hungry investors at the start of the month by boosting its payout by 50 per cent, sending its units up 5 per cent. But unlike it rivals, Baytex concentrates on producing oil, a commodity whose price has recovered from a drop to below $34 (U.S.) a barrel a year ago.

With most of the trusts leveraged to still-depressed natural gas prices, the lion's share of the sector's investors are unlikely to see distributions increased any time soon.

"I can't see too many (trusts) in a position to give an increase," said Les Stelmach, co-manager of Bissett Investment Management's $400-million Bissett Income fund. "Baytex is in an ideal situation."

Baytex's cash flow has been buoyed by robust oil prices, particularly for heavy oil. It usually trades at a steep discount to light crudes but the price has been supported in recent months by robust U.S. demand. Refiners there are looking for the lowest cost crude in order to wring out the most profit while margins for the business are squeezed.

Heavy oil prices in the United States are also being supported by falling imports from Mexico, where aging fields are producing less, as well as Venezuela.

By comparison, trusts such as Peyto Energy Trust , Paramount Energy Trust and Trilogy Energy Trust rely on natural gas for most of their revenue.

Benchmark gas prices on the New York Mercantile Exchange, recently around $4.59 per million British thermal units, have fallen by nearly 25 per cent over the past 12 months.

To be sure, there are a few other trusts that concentrate primarily on oil production, including the biggest: Canadian Oil Sands Trust , which holds the largest stake in the Syncrude Canada joint venture.

During the worst of the oil crunch, the oil sands trust cut its quarterly distributions to 15 cents a unit from the $1.25 paid out when prices were peaking last year. But as oil prices recovered, Canadian Oil Sands Trust raised its payout twice. It is now 35 cents a unit and some think that another increase could be in the offing.

"They would be a candidate for an increase. I think they've been signaling that," Mr. Stelmach said. "Given where oil prices are ... providing there are no unforeseen issues with their production."

There are, however, other issues that could convince the trust to wait on a payout increase.

It's seen as the logical buyer for ConocoPhillips' 9 per cent stake in Syncrude. Conoco put its interest in the oil sands project up for sale earlier this year. Some analysts say it could fetch as much as $4-billion.

As well, Syncrude has had frequent operating problems that can reduce production along with the cash flow of its owners.

A payout increase for the trust "depends on whether they go and buy ConocoPhillips' share of Syncrude, and we also need to see how production at Syncrude works out," said Phil Skolnick, an analyst with Genuity Capital Markets. "So it's really too early to say and they've already upped it twice," this year.

Penn West Energy Trust , which also relies on oil for the majority of its output, cut its payout by 35 per cent earlier this year to 15 cents per unit, earmarking the cash saved to cut debt and increase capital spending.

"I would not expect to see a bigger trust like Penn West ... raise distributions," said Jill Angevine, an analyst at FirstEnergy Capital. "They don't have as much financial flexibility as Baytex has. [Baytex]has kept a cleaner balance sheet ... and they've been able to do that because they're oil weighted."

Further clouding the picture is the pending demise of the trust format. Trusts pay few taxes in exchange for distributing the bulk of cash to investors. However the Canadian government is removing that benefit in 2011.

Trusts converting to corporations may seek to firm up balance sheets by retaining more cash -- though many have said they'll still pay dividends once the make the switch.

"These guys will convert to (corporations) and will have to decide if it will be a high-dividend or low-dividend model," Ms. Angevine said.

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