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Aerial view of rock containing oil deposits on the banks of the Athabasca River near the town of Fort McMurray in Alberta. (MARK RALSTON)
Aerial view of rock containing oil deposits on the banks of the Athabasca River near the town of Fort McMurray in Alberta. (MARK RALSTON)

Stocks

Pre-IPO bonanza for Athabasca backers Add to ...

The hot stock to own today is Athabasca Oil Sands Corp., with a super-sweet $4.25-per-share dividend.

What's that, you say? You don't own any? You don't know anyone else who owns any? The company hasn't even gone public yet?

That, my friends, is all part of the plan.

Athabasca Oil Sands is slated to be one of the biggest, most popular Canadian IPOs in quite some time. That's due in no small part to the imprimatur of PetroChina Co. Ltd., which ponied up $1.9-billion last year for a 60-per-cent stake in two of Athabasca Oil Sands' northern Alberta projects.

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At the time, it was widely believed the Chinese concern was bringing much-needed capital to the company - an impression that Athabasca Oil Sands helped with its own announcement.

"Oil sands projects are very capital-intensive long-term investments and difficult to fully finance in the traditional equity market," Bill Gallacher, the company's chairman, said in an Aug. 31 prepared statement. The PetroChina money "can ensure that the MacKay River and Dover projects will be developed in [a]timely manner, which is excellent news for Alberta and the rest of Canada."

Things have changed, as Athabasca Oil Sands now is sending more than $1.3-billion of PetroChina's money out the door in a special dividend to its private shareholders.

The dividend was slated to be voted on in a shareholders' meeting Friday and expected to be paid out today. (A spokeswoman at the Hill & Knowlton public relations firm said its client Athabasca Oil Sands, busy marketing its upcoming offering to Bay Street types, would make no comment for this column, including confirming the vote was made and the dividend was paid.)

Before we look askance at the company's management and board, perhaps we should turn an eye to the Tax Act. Here's how Athabasca Oil Sands explains its largesse in its IPO prospectus:

Thanks in large part to the PetroChina deal, Athabasca enjoys capital gains of roughly $1.9-billion. Under the Tax Act, only 50 per cent of a gain realized on the sale of a capital property is subject to tax. And if a capital gain is realized by a Canadian-controlled private corporation - which Athabasca still is - the company can distribute the non-taxable part of the gain to its shareholders in a "capital dividend."

It gets better. Athabasca says the capital dividend will not be included in its shareholders' taxable income - again, only if the company is still a Canadian-controlled private corporation when the dividend is paid. The company estimates it will pay $938-million in capital dividends.

And there's more. Canadian-controlled private corporations can recover $1 of what's called a Refundable Dividend Tax for every $3 in taxable dividends it pays out. Athabasca has $132-million in Refundable Dividend taxes, so it plans to pay out $397-million in taxable dividends in order to get the credit. Add up the non-taxable and taxable dividends, and you get to the $1.3-billion figure, which works out to $4.25 for each of Athabasca Oil Sands' 300 million-plus shares.

China's money makes Athabasca's early stockholders more than whole even before the IPO. The company sold shares at 10 cents apiece in a private placement not long after its 2006 founding. Other 2006 sales took place at $1 apiece for a unit of one share and warrant, and at $2.50 per share. (The most recent private stock sale hit the $10 mark.)

The big winners, in pure dollar terms, are members of the Ziff family, descendants of publishing magnate William Ziff Jr. According to Athabasca's prospectus, Ziff family partnerships own more than 56 million shares, which means they will gross $240-million from the dividend.

The directors and officers of the company own nearly 45 million shares, including 23.9 million currently held by Avenir Capital, a company owned by Mr. Gallacher, the chairman. (It was Avenir that owned the original leases that were Athabasca's first holding; the company issued stock and warrants in 2006 for the leases, valuing them at a little under $18-million at the time of purchase.)

All of this distributed wealth would make ample sense for a mature business, but Athabasca had just $2.4-million in revenue in the first nine months of 2009, after $5.5-million in revenue and nearly $24-million in negative cash flow in 2008. It projects it needs $2.4-billion for capital expenditures in the next five years.

This leaves us, I think, with a couple of questions. If Athabasca Oil Sands wants its special private-company benefits under the Tax Act, shouldn't it stay private, rather than ask public shareholders to hand over hundreds of millions to replenish its depleted capital? And will investors eager to get on board with the company realize they're replacing, not supplementing, most of PetroChina's money?

 

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