the energy of enerplus canadian royalty trusts friend or foe? ipaa presentation, june 16, 2005
TRANSCRIPT
The Energy of Enerplus
Canadian Royalty TrustsFriend or Foe?
IPA
A P
rese
ntat
ion,
Jun
e 16
, 200
5
2
Dramatic Sector Growthand Performance
Source: Bloomberg and public documents
Market Capitalisation
0
10
20
30
40
50
60
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
C$
bil
lio
ns
0
5
10
15
20
25
30
35
40
# o
f T
rust
s
# of Trusts
Trust Market Cap
Relative Performance
$426
$264
$241
$745
0
100
200
300
400
500
600
700
800
900
Ap
r-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
CD
N$
S&P/TSX Oil & Gas Exploration &Production Index
S&P/TSX Composite Index
S&P 500
Enerplus
3
Significant Force in Industry
Trust Reserves Growth
0
500
1,000
1,500
2,000
2,500
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Ye
ar
En
d P
rov
en
Re
se
rve
s (
MM
bo
e)
Source: Scotia Capital / First Energy Capital Corp. / Benjamin Financial
Note: Excludes Canadian Oil Sands Trust from Trust category and includes Penn West as a Trust in 2004
2004 Canadian Market Shareby Production
0%
5%
10%
15%
20%
25%
30%
4
Typical Structure
Unit HoldersBeneficial interest in thetrust
Assets or Royalties
Purchase units Cash distributions
Trust orIncome Fund
ManagementCompanyMajority of Companies areowned by Trust
Fees
Services
Operating Co3rd Party
Credit Facility
Creditfacility
Debtservice
Purchase assetsor royalties
Proceeds from saleof gas and oil
Trust owns inter-company note and receives interest and principal payments
or
Trust owns royalty and receives royalty payments
Trust lends Operating Co. money
or
Trust purchases royalty from Operating Co.
5
Structural Comparison
Canadian Royalty Trust US MLP US Royalty Trust
Structure: Publicly traded, mostmanagement companiesnow owned by the trust
Publicly traded partnership,general partner owns 1-2%interest and usually asignificant amount of limitedpartner units
Publicly traded withsponsor typically retaining asignificant net profitsinterest and often ownsunits
Tax Treatment: Pass-through entity withportions of distributionstaxable. Conversion totrust is non-taxable.
Pass-through partnershipwith complex partnershiptax rules. Conveyance ofassets is non-taxable.
Pass-though entity withdistributions fully taxable.Conveyance of assets is ataxable event.
Assets: Typically working interestwith majority operated.
Typically working interestwith majority operated.
Typical overrides withlimited / no operatorship.
Growth: Free to add assets,reinvest cash flow, issuenew units and incur debt.
Free to add assets, reinvestcash flow, issue new unitsand incur debt
Typically static asset inblowdown.
Management: Typically activelymanaged by internalemployees.
Actively managed byoutside general partner.
Passively managed bytrustee.
Owners Rights Comparable to publiccorporation with AnnualGeneral Meeting andelection rights
Limited rights to modifypartnership agreement.
Limited rights with norequirements for annualmeetings or periodicreelection.
6
Trusts Activity Focused OnValue Creation
Source: FirstEnergy Capital Corp., CAPP, and Benjamin Financial
Note: Includes Penn West as a trust in 2004
Total Wells Drilled and % Drilled by Trusts
0
5,000
10,000
15,000
20,000
25,000
30,0001
99
6
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
To
tal W
ells
Dri
lled
0%
2%
4%
6%
8%
10%
12%
% o
f W
ells
Dri
lled
by
Tru
sts
Total Wells Drilled
Trusts as % of total
7
Royalty Trust Drivers
• Perfect Storm for Royalty Trusts 2000 - Present• Robust energy prices
• Falling or modest interest rates
• Yield oriented investors
• Attractive relative performance
• Attractive Business Model• Tax efficiency
• Management discipline / corporate governance
• Risk mitigation
• Shift towards technical excellence
• Shift towards self sustainability
8
Impact on the Market
• Changed the landscape of Canadian E&P through conversions
• Driving increase in M&A metrics,especially longer-life, lower risk assets
• Increasing competition for labor, services, land, and capital
• Supporting US E&P MLP / LLC movement
• Driving asset sales, junior exits, and consideration of self-trusts by large independents and majors
9
Lofty Valuations
Price to Cash Flow
0
2
4
6
8
10
12
Canadian Juniors Canadian Trusts US Seniors Canadian Seniors
P /
CF
2005
2000
Source: Benjamin Financial Solutions
10
Trusts Driving M & A
Trusts % of Canadian M&A MarketDeals over C$100 Million
0
10
20
30
40
50
60
70
80
90
2001 2002 2003 2004
%
Source: CIBC World Markets and Sayer Securities Limited.
11
Macrotrends SupportContinued Growth
• Recent approval for index inclusion
• High commodity prices driving need for tax efficiency
• Maturing oil and gas sector
• Focus on value creation including international acquisitions
• Desire for risk mitigation and corporate discipline
• Investor demographics
• Dividend tax treatment in the U.S.A.
12
…Although not without issues
• Canadian market is getting crowded
• Increasing interest rates and spreads
• Sustainability of underlying reserves / unit
• Vagaries of US retail market
• Ability to attract / retain top quartile management and technical staff
13
Trust Model in the US
• Drivers• Favorable tax treatment
• Possible valuation arbitrage
• Positive Canadian experience
• Strong demand for yield
• Questions• Appropriate structure given commodity price risk
• Interest rate risk
• Trading liquidity and market pricing
• Memories from prior efforts
14
Future Expectations
• Canadian trusts will be aggressive acquisitors
• Strong equity markets, robust valuations, and forward markets support aggressive
bids
• Ideal acquisition mature property with some upside and low tax basis
• Trust market will continue to grow in and outside of Canada
• Continued product supply given valuation prospects
• More conversions likely including trust spinouts from large E&P
• Consolidations expected, due to lack of qualified management and desire for size
• International acquisitions will increase including US despite tax leakage
• Trusts will continue to move towards technical value creation including a
portion of exploration
• US structures will evolve based on Canadian experience
• US E&P MLP or LLC imminent
• Hi-split MLP’s structures vulnerable to competition over time
15
Industry Implications
• Trusts will be a strong competitor in Canada and will enter new markets
• US MLP / LLC could change the US M&A market over time
• Consider partnering on acquisitions with a strong Canadian Trust, especially in
limited tax pool situations or on deals with a mix of exploration and exploitation
upside which could be split
• Include trusts on all divestment offerings including infrastructure deals
• Develop long-term relationships - trusts are here to stay
16
A Final Suggestion . . . .
• Oldest and largest conventional trust (~75,500 BOE/day)
• NYSE and TSE listed (>US$4B EV)
• Superior equity value
• Strong technical staff
• Creative deal structures
• Tax advantaged
• Contact:
• Garry Tanner, Sr. Vice President and COO (403) 298-2724
• Ian Dundas, Sr. Vice President, Business Development (403) 218-4554
17
Enerplus Performance
Total Return (C$)
21.5%
41.1%
60.7%
19.9%
0%
10%
20%
30%
40%
50%
60%
70%
1 year 3 year 5 year 10 year
$426
$264
$241
$745
0
100
200
300
400
500
600
700
800
900
Apr-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
CD
N$
S&P/TSX Oil & Gas Exploration & Production Index S&P/TSX Composite IndexS&P 500 Enerplus
(1) Source: Bloomberg; Assumes the reinvestment of distributions and/or dividends; Based on the weekly closing price of Enerplus trust units on the Toronto Stock Exchange. S&P 500 was converted to CDN$ using the closing exchange rate at week end