April 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 south. 

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.