Energy sector income trusts have secure futures

High commodity prices will be with us for the foreseeable future and that’s good news for energy sector income trusts, Middlefield Capital president Garth Jestley told a Wellington West conference last week.

In the resource sector, “depletion is real,” Jestley said. He added production levels have peaked, so even if demand reduction takes place in the West, the developing world will keep oil prices high since it’s relied on so heavily for transportation.

Real Estate Investment Trusts (REITs) can also be viewed as a bargain right now. Jestley noted they’re trading at close to net asset value, or even at a bit of a discount, whereas in his opinion they should be trading at a premium because real estate firms are showing excellent business discipline.

Power and pipeline income trusts also will make good stabilizers in portfolios because cash flow remains fairly consistent regardless of whether the economy is doing well or badly. The fact that pension funds have started investing in income trusts is an indication markets have matured. Jestley said pension funds will watch performance and buy at dips for their portfolios.

As to tax treatment, Jestley said REITs were the least likely to be affected by potential changes being discussed in Ottawa. The IPO market for income trusts has largely been stalled by the federal government’s recent decision to stop issuing advancing tax rulings, according to a PricewaterhouseCoopers study. In addition, the federal government announced in October that it would begin consultations on trusts. Ottawa estimates it’s lost roughly $300 million because income trusts don’t pay corporate taxes.

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com