Energy Prices, Equalization and Canadian Federalism: Comparing Canada’s Energy Price Shocks
Canadian Energy Trusts
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Transcript of Canadian Energy Trusts
Canadian Energy TrustsTina ChenHardeep Gill
Amandeep HundalBus 417 10-1
INCOME TRUSTS• Stock symbols ending with ‘.UN’•Structured to own debt and equity, or royalty in revenues of an underlying asset•Purpose: to facilitate distributions to investors on a tax-efficient basis•Adopted by businesses that require a limit amount of capital in maintaining their PPE (generate stable cash flow)• Earnings are distributed to investors each month or quarter, with yield from 6-20% a year
TYPES OF INCOME TRUSTS
• Business Trusts
• REITs
• Utility Trusts
•Energy/Royalty Trusts
INTRODUCTION TO ENERGY TRUSTS• First listed in 1987; also known as Royalty
Trusts• Similar to mutual funds•An integral component of the Canadian Oil and Gas Industry• Investment vehicle that may engage in the development, acquisition and/or production of oil and gas reserves
•A certain high percentage of profits are distributed as dividends•Profits are not taxed at the corporate level •As interest rates rise, share prices decline; as interest rates fall, share prices rise•Attract investors with relatively high yields
INTRODUCTION TO ENERGY TRUSTS
HOW ENERGY TRUSTS WORK1.Receives royalty income from producing
properties (net cash flow)2.Sells interest in the trust (trust units) to investors 3.All of the cash flow generated by the oil
and gas assets, net of certain deductions and based on payout ratios, is passed on to the unitholders as royalty income• In general, the largest variable in determining the level of cash flow is prices for crude oil and natural gas
INCOME TRUSTS: GROWTH
TYPES OF ENERGY TRUSTSAmerican: • Not allowed to acquire additional
properties once formed• Maintain existing assets• Distribute cash until their natural-resource
assets are depletedCanadian:• Allowed to be actively managed and run as
businesses• Generate capital expenditures
TAX FAIRNESS PLAN
OCTOBER 31, 2006
• Creating a level playing field between income trusts and corporations.
• Stop the trend of corporate tax avoidance • Stop shifting any future tax burden onto hardworking individuals and families
TAX FAIRNESS PLANMEASUREMENT
• A Distribution Tax on income trust• A reduction in corporate tax of 0.5% as of January 1, 2011• The new tax on income trust dividends will be 29.5% in 2011 and 28% thereafter
S&P/TSX CAPPED ENERGY TRUST: 1-YR
S&P/TSX CAPPED ENERGY TRUST: 5-YR
ENERGY TRUST VS. INCOME TRUST
1-YR
ENERGY TRUST VS. INCOME TRUST
5-YR
INTRO TO CANADIAN OIL AND GAS
• Main production occurs in Alberta• Largest single source of oil imports to the
USA• Seventh largest oil producing country in
the world• In 2008, it produced an average of
2,750,000 b/d• 45% conventional crude oil• 49.5% bitumen from oil sands• 5.5% natural gas wells
CONVENTIONAL CRUDE OIL• A naturally occurring mixture of hundreds of
different hydrocarbon compounds trapped in underground rock
• Canada exports over 1,000,000 b/d of oil to US markets accounting for 10.9% of US oil imports
• Refers to light, medium and heavy hydrocarbons
• Conventional crude oil is produced by drilling wells
• Cheaper to produce
CONVENTIONAL CRUDE OIL PRICE
CRUDE OIL IMPORTS AND EXPORTS
NORTH AMERICAN OIL RESERVES 2007
OIL SANDS• A naturally occurring mixture of sand, clay
or other minerals, water and bitumen• Bitumen is a heavy and extremely
viscous(“thickness”) oil that must be treated before it can be used by refineries to produce usable fuels
• Can be found in several locations around the globe
• Non-conventional crude oil deposits is too thick to flow in its natural state and requires special methods to bring it to the surface
• More costly to produce
OIL SANDS
• Mixture of sand, clay, water, and bitumen• Synthetic crude oil is extracted from oil sands and is often sold at a premium because of its high quality• More costly to produce
TYPES OF OIL SANDS• Light crude oil: liquid petroleum with gravity of 28
degrees API or higher • API gravity measures how heavy or light a petroleum liquid
is compared to water• If API gravity is greater than 10, it is lighter and floats on
water; if it is less than 10 it is heavier and sinks• Heavy crude oil: liquid petroleum with gravity of 28
degrees API or lower• Bitumen: petroleum in semi-solid or solid form that
is found in bituminous sands. It is so heavy (gravity below 12°API) and viscous that it will not flow unless heated or diluted.
• Synthetic crude oil: a product similar to a high-quality light crude oil. It is made by refining or upgrading heavy oil or bitumen. From 31-33°API
OIL SANDS – RESISTANCE TO FLOW
OIL SAND PRICE
WORLD’S LARGEST OIL RESERVES 2008
OIL SAND RESOURCES
CRUDE OIL VS. OIL SANDS
NATURAL GAS• One of the cleanest, safest, and most useful
forms of energy in our day-to-day lives• Can be found by itself or in association with
oil• Colourless and odourless; a mixture of
hydrocarbons• Impurities are removed before it is delivered
to homes and businessesUsers:
• Residential• Commercial• Industrial
CANADIAN NATURAL GAS PRICE
NATURAL GAS RESERVES
NATURAL GAS – ALBERTA HUB
TRANSPORTATION
• UpstreamExploration and production
• MidstreamPipeline, transportation and storage
• DownstreamRefining, marketing, and retailing
RECOVERY METHOD• Open-pit mining
Recovers bitumen closer to the surface (< 200 ft)
Uses trucks and shovels Able to recover only 20% of oil sands
• In situ drilling Recovers bitumen deeper underground (>
200 ft) Uses advanced drilling technology
• directional drilling Able to recover 80% of oil sands Injects steam or solvents into the
reservoir to mobilize the thick bitumen so it can be pumped to the surface
• CSS• SAGD
CYCLIC STEAM STIMULATION (CSS)
• Huff & Puff method• Used at Cold Lake• Advantages: •Requires only 1 well bore•Adaptable to thinner, inter-bedded reservoirs
• Disadvantages:• Lower recovery factor
STEAM ASSISTED GRAVITY DRAINAGE
• Used at Athabasca• Advantages:• Higher bitumen
recovery• Continuous
process• Disadvantages:• Requires two wells• Requires clean,
continuous reservoirs
HARVESTING BITUMEN
OIL REFINERY
An industrial process where crude oil is processed and refined into more useful petroleum products
OIL REFINING PROCESS
1. Fractional distillation
2. Conversion3. Treatment4. Combine
GAS AND OIL: TRENDS
• Declining conventional means & increasing role for non-conventional crude oil & natural gas• Technology has unlocked vast supplies of
shale gas across North America• Increasing interdependence with North
American markets
INTER PIPELINE FD CLASS’A’LTD P (IPL-UN.TO)
IPL – 1-YR CHART
IPL – 1-YR VS. S&P/TSX 60 (MARKET)
IPL – 1-YR VS. S&P INCOME TRUST (INDUSTRY)
IPL – 5-YR CHART
IPL – 5-YR VS. S&P/TSX 60 (MARKET)
IPL – 5-YR VS. S&P INCOME TRUST (INDUSTRY)
COMPANY OVERVIEW Created in 1997, Calgary, Alberta Publicly traded Canadian limited partnershipAn energy infrastructure business that provides
unitholders with a stable source of monthly cash distribution
Transport petroleum and extract natural gas liquids Operations:
Oil Sands Transportation NGL Extraction Conventional Oil Pipelines Simon Storage Limited (Bulk Liquid Storage)
OIL SANDS TRANSPORTATIONLargest oil sands
gathering business in Canada Cold Lake Pipelines Corridor Pipelines
Transport approximately 35% of the total oil sands volume (582,000 b/d)Cold Lake Pipeline
system is the sole transporter
Transport approximately 560,000 b/d of bitumen blend
NGL (NATURAL GAS LIQUIDS) EXTRACTIONProcess pipeline quality
natural gas to remove NGL (ethane, propane, butanes and pentanes-plus)
Fraction NGL stream to produce ethane product and a mix of others)
Ownership: 100% in Cochrane and Empress II plants; 50% in Empress V plant
NGL are used directly as an energy product and as a feedstock for the petrochemical and crude oil refining industries
CONVENTIONAL OIL PIPELINES
Deliver crude oil from producer owned batteries and truck terminals to key market hubs in Alberta and Saskatchewan Transports approximately 15% of the total conventional oil (169,000 b/d of crude oil in 2009)
SIMON STORAGE LIMITED A wholly owned subsidiary Handles and distributes Bulk Liquid Storage in the UK, German and Ireland Owns and operates 8 bulk liquid storage terminals with a storage capacity of approximately eight million barrels in Western Europe Integrated with the operations of major regional oil refining and petrochemical complexes Complementary: Receive and distribute products via ship, rail, truck and pipeline
COMPANY STRUCTURE
PRESIDENT &CEO Since November 1997 Background
BSc – Arizona State MBA – University of Calgary
Employed in Esso Petroleum Canada Ltd. and various geological consulting firms 1991-2002 – Senior Exec at various affiliates of Koch Industries (petroleum, pipelines, other commodities) Director of South Saskatchewan Pipeline company
David W. Fesyk
DIRECTOR & BOARD CHAIRMAN
John F. Driscoll
Since October 22, 2002 Background
BSc – Boston College Business School Member of CFA institute Professional manager designation –
Canadian Institution of Management Founder, President, Chairman and CEO of Sentry Select Capital Corp. Founder & Chairman of NCE Resources Group and Petrofund Energy Trust Chairman of Strategic Energy Fund, Endev Energy Inc., C.A. Bancorp. And Charter Realty President of J.F. Driscoll Investment Corp.
OPERATING HIGHLIGHTS: STEADY GROWTH
OPERATING HIGHLIGHTS: 2009 Cash distributions to unitholders totalled $202 million or $0.845 per unit (2008: $187 million) Throughout volumes on Inter Pipeline’s oil sands and conventional oil pipeline systems averaged 751,800 barrels per day Corridor pipeline system expansion project is mechanically complete Entered into a 25-year, 60,000 b/d ship-or-pay diluent transportation contract for the Kearl oil sands project Successfully raised over $260 million in equity capital Conservative year end recourse debt to capitalization ratio of only 36% (2008: 42%)
OPERATING HIGHLIGHTS: FINANCIALS
FINANCIALS – BALANCE SHEET
FINANCIALS: INCOME STATEMENT
FINANCIALS: CASH FLOW STATEMENT
2009 COMPARISON: KEY RATIOS
IPL IndustryP/E 17.75 8.78
Gross Margin 40.75 12.89Operating
Margin 13.37 7.26Current Ratio 0.52 2.91
ROE 12.87 8.72ROA 3.67 6.55D/E 199.35 15.88
CONCLUSION – ST FORECAST
CONCLUSION – LT FORECAST
Purchase longer life assets to be less exposed to exploration risk
RECOMMENDATION
Moderate Buy
COMPANY SNAPSHOT
•Traded on the TSX as PWT.UN and the NYSE as PWE•421 million shares outstanding•Market Cap of $9138.23 Million•Currently has 1950 employees
• Based in Calgary, Alberta, Penn West is the largest conventional oil and natural gas producing income trust in North America.
• Have land equal to 7 million acres mostly in western Canada
• Penn West’s production averaged 177221 boe per day at December 31, 2009, of which just under half was natural gas
• In May 2005 Penn West converted from a senior independent exploration and production company into an income trust.
• The opening June 2005 cash distribution rate to unitholders was $0.26 CDN per unit monthly, and was payable in July.
• Current Distributions are $0.15 per month
BACKGROUND
DISTRIBUTIONS
5-YR WITH 50 AND 100 DAY MA
1-YR WITH 50 AND 100 DAY MA
1-YR VS. TSX
1-YR VS. LIGHT SWEET CRUDE OIL
5-YR VS. LIGHT SWEET CRUDE OIL
DAILY PRODUCTION PER YEAR
• Light Medium oil is less dense then Heavy oil•Heavy oil a lot harder to transport which makes it less desirable• The oil that comes from the oil sands in Alberta is primarily heavy oil
PROPORTION OF BUSINESS
AREAS OF BUSINESS
West Central Alberta- Cardium
•Largest land holder in Cardium with 570000 acres
•Production is about 25000 BOE per day with a large portion of it as light-oil
•In 2010, Penn West is planning on drilling 35-50 horizontal wells in this area
AREAS OF BUSINESSDodsland Saskatchewan- Viking• Penn West owns about 120000 acres in the area with light-oil potential• Recently began production with the drilling of 35 oil wells, which ended up producing 70-75 BOE per day
Waskada Manitoba- Lower Amaranth• Penn West owns about 50000 acres in this area, which has a majority of light-oil• Currently produces about 1200 BOE per day• Plans to drill 35-50 new wells in this area as they have experienced recent success
MAP
BUSINESS ENVIRONMENT• Recession has had a significant impact on crude oil demand in 2009• Oil prices started 2009 near their 2008 lows and then steadily improved• As a result of countries such as China moving out of the recession quickly oil demand is expected to increase in 2010
• Natural gas prices have declined over most of 2009 but began to pick up in the last quarter of 2009• The demand for natural gas has however began to increase as power generation is switching in a lot of areas from coal fired plants to natural gas based ones
•Penn West will convert in to a corporation in mid 2011
STATEMENT REGARDING SIFT
RECENT ACQUISITIONS
RECENT ACQUISITIONS - CANETIC
RECENT ACQUISITIONS - VAULT
William E. Andrew - President and CEO• Petroleum Engineer with more than 30 years of oil
and natural gas industry experience, including 14 years with Penn West.
• Engineering diploma from the University of Prince Edward Island in 1973 and a bachelor degree in engineering from Nova Scotia Technical College in 1975.
• He previously held senior positions at Gulf Canada, Shell Canada, Canadian Occidental Petroleum, Ocelot Industries and served as a Vice President at Opinac Exploration.
• Joined Penn West in 1992 as a director and a key member of the board.
• He was named President of Penn West in 1995 and President and Chief Executive Officer in June 2005.
• On the Board of Governors of the Canadian Association of Petroleum Producers and is the Chancellor of the University of Prince Edward Island.
MANAGEMENT TEAM
David Middleton - Executive Vice President and COO
• Professional Engineer with more than 25 years of oil and natural gas industry experience since graduating from the University of Toronto with a degree in Engineering.
• He has been with Penn West since 1999 holding the Vice President, then Senior Vice President, Production positions between 2001and 2005.
• In 2005, Mr. Middleton assumed overall day-to-day responsibility for Penn West’s oil and natural gas operations as its Chief Operating Officer.
MANAGEMENT TEAM
Todd Takeyasu - Senior Vice President, and CFO
• Chartered Accountant and a Certified Internal Auditor with more than 23 years of oil and natural gas industry and public accounting experience.
• He has been with Penn West since 1994 in various positions including Financial Controller, Treasurer from 2001 to 2005 and Vice President, Finance until 2006 when he was promoted to Chief Financial Officer.
• He is a 1983 business school graduate of the University of Lethbridge.
MANAGEMENT TEAM
FINANCIALS – BALANCE SHEET
•The total component of goodwill is based on the acquisitions of Petrofund energy trust, Canetic Resources Trust, and Vault Energy Trust
FINANCIALS – GOODWILL
•Majority of their debt is in the form of prime rate loans
FINANCIALS – LONG TERM DEBT
• Majority of their Risk Management is in the form of collars on the spot price of oil
• Penn West received a large, unrealized, hit on their earnings as a result of the hedging practices in 2009 but in 2008 it led to a net gain
FINANCIALS – RISK MANAGEMENT
FINANCIALS – CAPX
FINANCIALS – INCOME STATEMENT
FINANCIALS – CASH FLOW STATEMENT
HOLD
RECOMMENDATION
STOCK OVERVIEW
• Traded on TSX and NYSE• Tickers: BTE.UN (TSX) and BTE (NYSE)
•Unit Trust- plans to convert to a corporation by the end of 2010•Shares: 109.299 million•Market Capitalization: $3,858.42 million
UNITHOLDERS’ CAPITAL
5-YR VS. LIGHT SWEET CRUDE OIL
1-YR WITH 50 AND 100 DAY MA
5-YR WITH 50 AND 100 DAY MA
1-YR VS. S&P/TSX
5-YR VS. S&P/TSX
Baytex Energy Trust is a Calgary, Alberta based conventional oil and gas income trust engaged in the acquisition, development and production of oil and natural gas in the Western Canadian Sedimentary Basin with an emerging presence in the United States. Baytex is focused on maintaining its production and asset base through internal property development and delivering consistent returns to its unitholders. Trust units of Baytex are traded on the Toronto Stock Exchange under the symbol BTE.UN and on the New York Stock Exchange under the symbol BTE.
BAYTEX ENERGY TRUST OVERVIEW
BAYTEX ENERGY TRUST: OPERATIONS
BAYTEX ENERGY TRUST: OPERATIONS• Heavy Oil production is cornerstone for Baytex• Heavy oil Business unit- more than 60% of current production and more than 70% of oil-equivalent reserves- averaged 25,900 boe per day (95% crude oil)• Mainly cold primary production- but waterflooding and thermal operations are also used• Key properties- Llyodminister region (west central Saskatchewan), Kerrobert (southwest Saskatchewan), and Seal (Northwest Alberta)
BAYTEX ENERGY TRUST: OPERATIONS
BAYTEX ENERGY TRUST: OPERATIONS
BAYTEX ENERGY TRUST: OPERATIONS
BAYTEX ENERGY TRUST: OPERATIONS
BAYTEX ENERGY TRUST: ACQUISTION• June 4, 2008- acquired Burmis Energy Inc.- public company with interests in Natural Gas and Light Oil in west central Alberta•No Goodwill on purchase
RESERVE INFORMATION
RESERVE INFORMATION
PRODUCTION
BAYTEX ENERGY TRUST OVERVIEW
CURRENT ASSET MIX
FUNDS FROM OPERATIONS
POTENTIAL DISPOSITION
BAYTEX ENERGY TRUST OVERVIEW
BAYTEX ENERGY TRUST OVERVIEW
BAYTEX ENERGY TRUST OVERVIEW
BAYTEX ENERGY TRUST OVERVIEW
BAYTEX ENERGY TRUST OVERVIEW
DISTRIBUTION INFORMATION - 2009
DISTRIBUTION INFORMATION - 2010
MANAGEMENT• Appointed on January 1, 2009
• Joined Baytex in November 2004 as COO and was promoted to President and COO in November 2007
• Prior to joining Baytex he was the President and CEO of Dominion Exploration Canada Ltd.
• Registered Professional Engineer, CFA, and over 25 years experience in the North American Oil and Gas industry
•Bachelor of Science from the University of Kansas and a MBA from California State University
Anthony W. MarinoPresident and Chief Executive Officer
MANAGEMENT
FINANCIALS – BALANCE SHEET
FINANCIALS – INCOME STATEMENT
FINANCIALS – CASH FLOW STATEMENT
RECOMMENDATION
BUY