The outlook for the sustainability of Canadian energy royalty trusts remains positive under current commodity prices, report analysts with Canadian investment-banking firm FirstEnergy Capital Corp. "Many of the recently converted trusts are following a new model with lower payout ratios and higher-impact drilling activities which should produce greater sustainability in a trust model," say Jill Angevine and William Lacey. The two estimate Canadian oil and gas trust payout ratios for 2005 and 2006 at 75.9% and 74.1%, respectively, "which are still reasonable and leave room for expansion." For 2004, total returns posted by the FirstEnergy Oil and Gas Trust Index, made up of a coverage universe of 19 trusts, were a modest 3% lower than the S&P TSX Energy Index, but still a healthy 26%. Says Angevine, "Years of steadily compressing yields, a broadening of the peer group, a declining yield curve and healthy commodity prices have resulted in overall returns beginning to moderate somewhat." At the extreme ends of 2004 performance, Peyto Energy Trust and Harvest Energy Trust posted total returns north of 80%; Penngrowth Energy Trust, Zargon Energy Trust and Petrofund Energy Trust, meanwhile, posted net losses for the year. The analysts recommend that investors orient themselves toward strong technical management teams, energy trusts with internal prospects, reasonable reserve-life indices and prudent levels of financial leverage. Their top energy trust picks for 2005 are Bonavista Energy Trust and Starpoint Energy Trust. Rated as Outperform are Acclaim Energy Trust, Esprit Energy Trust, Harvest Energy Trust and Peyto Energy Trust. Angevine and Lacey note that both Bonavista and Starpoint have below-average operating costs; Peyto and Focus Energy Trust, the lowest. Applying other metrics, they point out that Peyto, Focus and Starpoint produce the strongest netbacks within their coverage universe while Starpoint takes first place on a revenue-per-equivalent-barrel basis. Focusing on trust sustainability, the researchers observe that Peyto, Vermilion Energy Trust, ARC Energy Trust and Enerplus Resources Fund have the longest reserve-life indices.

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