Oil trusts may be prey for juniors
CALGARY -- Even though the deal to sell his company had fallen apart just before the weekend, Craig Stewart was surprisingly upbeat on Monday morning.
That's because the chief executive officer of Rider Resources Ltd., who had agreed to sell his company to Shiningbank Energy Income Fund back in September for $426-million, has a plan and the ability to carry it out.
The company's capital expenditure budget is $50-million, and Mr. Stewart says they are going out in the first quarter and drilling 25 wells. Even better, he says, there are rigs and equipment available, with costs about 15 per cent lower than what they were at this time last year.
"This may turn out to be a great opportunity for us," Mr. Stewart says. "It's just unfortunate we had to go through all the pain."
That's in contrast to Shiningbank, which Mr. Stewart says has neither clarity nor a business plan.
His comments are in no way malicious. Rather, they reflect the current state of affairs for the industry, given the lack of information about how the government has moved ahead with the income trust file.
It's been more than five weeks since Finance Minister Jim Flaherty dropped his bombshell announcement, effectively slamming the door on future income trusts, and there has been little forthcoming since then to further clarify the situation, beyond the promise of some clarity before the end of the year.
"The key things for the trust sector are whether there will be any change in the time frame -- because the Bloc Québécois is pushing to increase the time limit from four years to 10 -- and what access to capital they will have in the intervening period," says Mr. Stewart, who headed up Poco Petroleums until it was sold to Burlington Resources in 1999 for $3.5-billion.
The reasons for selling to Shiningbank back in September were similar to those of other companies of its size, production of 10,000 barrels a day, doing the same thing -- selling to a trust that needed the assets to maintain distribution levels.
And even though Mr. Stewart is optimistic about his growth prospects, and says the merger being called off is "directionally better" for Rider, he maintains selling to Shiningbank was the right thing to do at the time.
"We couldn't be competitive in the acquisition market because of the cost of capital advantage enjoyed by the trusts," he says.
And now, with the trust model in limbo, there is reason to believe a resurgence of an intermediate sector is in the cards; how big it is will depend on what the final legislation looks like.
In addition to the potential for merger activity among the junior crowd who have hit the proverbial growth wall, it's not out of the question that instead of trusts buying conventional exploration and production companies (E&Ps), it will be the other way around.
The determining factor in this regard has to do with market valuations. As it stands now, especially with all the uncertainty, the heady market prices for the trusts have come down, though not quite far enough to be in bargain territory.
Until this happens, don't expect a merger frenzy with the E&Ps leading the charge to buy trusts.
The other part of this is the appetite of institutional investors to snap up equity issues to finance merger deals. In as much as the equity market has all but dried up for the trusts and is still open for the conventional companies, investors are getting picky as to which companies they choose to back.
But there are other factors that could affect the development of an intermediate sector. The private equity firms are said to be circling the trusts, looking for a buying opportunity as are the U.S.-based master limited partnerships, or MLPs, which are similar to trust vehicles. Whether the MLPs start buying Canadian energy companies depends on whether their structure allows them to hold assets outside the U.S. and maintain their tax-exempt status.
But no matter how all this unfolds, the inescapable fact is that it's not just the Canadian energy landscape that has been significantly altered. It's the country's capital markets. Shiningbank's deal is off and the shareholder vote for the Crescent Point transaction has been postponed until Dec. 18.
The fact the federal government has let five weeks go by without offering further guidelines is unconscionable. The longer it goes on, the worse it gets in terms of degrading Canada's reputation as a good place to do business in the context of the global economy.
