Similarities and Differences Between Canadian Energy Trusts and U.S. Royalty Trusts

There are a few key differences between Canadian energy trusts and U.S. royalty trusts. Whereas U.S.-based royalty trusts (which are legally precluded from making acquisitions financed by new debt and/or equity and, therefore, cannot as readily replace depleted reserves) are essentially blow-down vehicles, the experience to date for Canadian energy trusts has been very different. In fact, Canadian energy trusts have managed, during certain extended periods, to actually increase per trust unit production, discounted cash flow value and distributions, in addition to maintaining reasonable monthly or quarterly distributions on the trust units. The ability to acquire assets and finance them with new equity, combined with a tax-efficient structure, leads to a financial vehicle that is radically different from its U.S. counterpart.

Apart from the ability to grow and replace reserves, there are other noteworthy structural differences between Canadian energy trusts and their U.S. counterparts. Of these, the most significant relate to the substantial component of U.S. royalty trust assets that are actually overriding royalty interests, as opposed to the vast majority of Canadian energy trust assets, which are operated and non-operated working interests. In this sense, Canadian energy trusts are more similar to conventional oil and gas production companies (albeit with no higher-risk exploration activities) than U.S. royalty trusts, which in many instances can be more accurately characterized as financially structured derivative instruments to oil and gas assets.

Canadian energy trusts appear to offer a somewhat higher yield than their U.S. counterparts, which may, in part, reflect the overriding royalty nature of the U.S. royalty trusts’ cash flows (and, therefore, lower operating leverage and capital requirements). The U.S. royalty trusts typically have no debt, reflecting the blow-down character of their assets and operations and the absence of acquisition activity. Meanwhile, Canadian energy trusts do carry some debt, reflecting previous acquisition activity and development capital, which are typically funded, in whole or in part, with debt.