In Energy We Trusted
Were income trusts just too good to last?
“People in Alberta have not yet grasped the magnitude of the job losses associated with this proposal,” Rankin said. “There is a very straight line between this proposal and lower oil and gas investment in Canada.” He predicted many crippled trusts would disappear into leveraged buyouts, by definition enterprises with high debt levels and very low taxability. “Higher debt does not equal higher investment,” he observed.
“The people who designed this tax policy didn’t understand the consequences,” Rankin said. “Their perception of capital markets is remarkably poor. In addition, the government has failed to create a factual case for this action.”
Absent any properly demonstrated case against the trusts, Ottawa’s phobia appeared primarily ideological. The PM and the finance minister said they were acting to protect the Canadian economy, reciting the finance department mantra that trusts stunt business growth. This theory says that, since trusts distribute the bulk of their cash to investors, there’s nothing left to reinvest in the business.
Rankin said Finance has failed to understand the evolution of trusts to lower payout ratios, precisely so that they could increase reinvestment levels. Defenders of the sector said trusts buy up moribund assets and whole businesses, reinvest in them, rejuvenate them and spin out cash to investors who spend it or reinvest it. And, prior to the Hallowe’en ambush, whenever trusts needed additional cash to expand, they simply issued new units through a capital formation tool that was startling it its efficiency.
In energy we trust
Energy trusts were in many ways the best examples of the trust model in action.
“I can show you case, after case, after case where we have taken over large (declining) fields and stabilized production,” Dielwart said. Indeed, many of Canada’s largest oil fields are now wholly or substantially in the hands of energy trusts, which have rescued these assets from the fading interest of major producers, turned them around and provided the sellers with major cash infusions to be invested in further exploration or oilsands development.
As a result, trusts currently lift 20 per cent of all the oil and gas produced in Canada, about one million barrels of oil and equivalents each day, according to the Coalition. “I challenge the minister, in his comments, to continue to say that we are passive in our investments,” Dielwart said. Angry as he was, Dielwart rejected suggestions by a few reporters that the trust offensive was in any way politically comparable to the National Energy Program launched by the Liberal government of the 1980s.
“This is not an East-West thing,” Dielwart said. But he added that, searching for an analogous level of impact on investors, he asked other CEOs, “Has the Canadian government ever made a decision that has ever affected capital markets the way this one has? And the only analogy we could come up with was the NEP.”
Others offered different impact measures. Canaccord Adams circulated an e-mail in which they said, “The capital destruction experienced during the past couple of days exceeds the annual GDP of each of Nova Scotia and New Brunswick and is approaching the GDP of each of Saskatchewan and Manitoba. It exceeds the combined GDP of PEI, Newfoundland, Yukon, NWT and Nunavut. (We) wonder if such draconian policy would be pursued if policymakers understood the impact is akin to amputating these regions from Canada?” As when the Liberals were driven to retract a similar move against trusts before the federal election, Canaccord is again publishing a detailed defense of the energy trust sector, together with a list of phone numbers of all Canada’s Members of Parliament.
Will lightning strike?
The carnage caused by the Hallowe’en debacle was substantially less than Hurricane Katrina, but handily larger than Hurricane Rita.
“This is not a natural disaster,” said Gordon Currie, investor relations manager for NAL Oil & Gas Trust. “This was manmade.”
Finally, it fell to Canada’s foremost political commentator, comedian Rick Mercer, to crystallize the issue by recalling the last federal election campaign.
“I heard Stephen Harper tell us over and over again that when he became Prime Minister income trusts would be safe. It was a promise he made directly to Canada’s senior citizens. I believed him. And so did a lot of seniors, apparently, because they kept investing in the bloody things.
“The next time Stephen Harper or any of his minions chant ‘promise made, promise kept,’ you might want to step back,” Mercer advised, “because if there is a God, the forecast calls for lightning.”
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