The landscape of the Canadian oil and gas market has changed dramatically from the late 1990s in part from the rise of royalty trusts. But even these are now adapting a new business model, says Shaun Finnie, Calgary-based director, M&A, for Scotia Waterous, a division of Scotia Capital. "Royalty trusts are now the driving force behind both the equity markets and M&A markets (in Canada)," he told the Houston Energy Finance Group recently. The trust market is so attractive to chief executives and so well-received by investors that since January 2003, some 18 E&P companies have converted to the trust structure, he said. Trust size has grown as well: 11 of the 35 energy trusts now public in Canada have a market value greater than C$2 billion each. Scotia Capital has found that reserve-life index is the only consistent measure that correlates to a trust's market valuation. Buying long-life properties has been the main avenue to that reserve life. But today, as more trusts try to differentiate themselves, they are changing. More trusts are devoting a higher percentage of their cash flow to drilling, as opposed to distributions to investors. They are seeking U.S. assets and heavy-oil production, and they are evaluating international ideas. Finnie expects more consolidation among the trusts, although there have been only three such mergers to date. Collectively each year, the trusts have to replace more than 140,000 barrels of oil equivalent per day of production. To fund the necessary acquisitions, since January 2004, 25 of the 35 have accessed public capital. Convertible debt accounted for 24% of the funds raised. Private equity is becoming an increasingly popular source of funds. For more on this, see the September issue of Oil and Gas Investor. For a subscription, call 713-993-9325 Ext. 126.

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