Oil and gas trusts unstable, S&P says

(January 12, 2004) Investors who put their money into energy trusts, thinking they were safe and stable investments, were warned of stability issues in that sector by Standard & Poors (S&P).

According to the ratings agency, most “upstream” trusts rank no better than SR-5 (marginal stability)or SR-6 (low stability) in terms of revenue stability. The report gave a slightly better stability rating of SR-4 to only one upstream trust — Canadian Oil Sands Trust (COST).

Upstream companies are those which extract oil and natural gas from the ground, while midstream firms transport the product and downstream companies refine the oil and market it to consumers.

S&P took into consideration factors concerning all oil and gas companies, such as size and diversity of operations, asset quality, decline rates, reserve life, track record of management, and content and form of risk management program.

The report also focused on issues it said were peculiar to the upstream trusts within the oil and gas sector: operating costs and total cash costs per barrel of equivalent; acquisition, finding and development costs to maintain reserves; hedging program costs; and external management fees where applicable.

The report clustered the upstream funds in the SR-5 and SR-6 ratings. Higher capitalization trusts tended to fall into the marginal rating, while small trusts were less stable. Far more stable are real estate trusts, which the report says have an average rating of SR-3, while power generation and pipelines trusts are considered to be even more stable.

Among the reasons for COST’s higher SR-4 rating, the S&P report cited the unusually long reserve life. The average reserve life in other trusts is 10 years, meaning without new acquisitions the average fund would run out of oil in 10 years. Because COST is operating in the vast oil sands, it is expected to have a far longer life.

The report did praise the move to internal management over the past year, as many funds eliminated their more costly external managers. The move to internalize trust management also more closely aligned the interests of the managers and the investors.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com