29, 2002; Provident Energy Trust Provides Income Without Excessive Manager Greed
We ran into an increasing number of our Canadian friends at the IPAA
meeting. Contrast that to a few
years ago when the IPAA railed against unfair competition from Canadian natural
gas producers. One point we made in
conversation was that the Canadian royalty trusts seemed to be far more investor
friendly than the U.S. master limited partnerships with their general partner
tax. That point was greeted with
some skepticism because royalty trusts can sometimes be at the high end of the
fee scale in Canada. Thus the
Canadian royalty trusts seem to have an opportunity to expand their market in
the U.S. at the expense of high Greed Gauge partnerships just as Canadian
natural gas producers have increasingly marketed to their neighbors to the
We add Provident Energy Trust (PVX) to our coverage in our Small Cap
Natural Gas and Oil group at a McDep Ratio of 1.19 and a ratio of debt to
property of 0.46. That looks a
little expensive compared to Canadian producer, Purcell Energy, for example.
It is a lot lower than its U.S. counterparts among income securities
where the McDep Ratio ranges as high as 2.00 for Kinder Morgan.
Canadian royalty trusts are treated like master limited partnerships by
U.S. taxpayers. That fits because
Canadian royalty trusts are active businesses whereas U.S. royalty trusts are
passive holders of fixed interests. There
is no general partner tax at PVX. There
is what could be legitimately, not just euphemistically, called incentive.
The managers, who must be rehired every three years, can earn 6% of
investors’ total return above 8% per year.
Contrast that to Kinder Morgan where new investors pay the general
partner tax on income and principal of 39% (50% incremental) whether they make
money or lose money on their investment.
Apparently Canadian royalty trusts are generally valued at a premium to
producers. One might say that
investors are keenly interested in cash returns and wary about taking
exploration risk. Recognizing this,
the managers of PVX deliberately converted their producing company to a royalty
trust. Now PVX offers high income
to investors and to producers an opportunity to cash in proven reserves for
capital to be used to create new proven reserves.