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Canadian Oil & Gas Trusts

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  1. Canadian Oil & Gas Trusts Group 4 Owen Hosford Nick Morneau Parry Pasricha Angela Meng

  2. Agenda • Canadian Oil & Gas Trusts • Companies: Canadian Oil Sands Trust

  3. Income trusts

  4. What Are Income Trusts? • Corporate Trust Structures: - Entities that direct royalties or income to trust holders - Payments from interest, royalty or lease • Benefits: - Legally bypass corporate taxation (eliminates double tax) - Allows for larger distributions • Analysis: - Attractive for their high yields - Interest rate sensitive; inverse relationship between interest rates and share price

  5. Income Trusts

  6. Evolution of Income Trusts • Emerged in 1987 as ‘Royalty Trusts’ • Created to spur growth in Canada’s energy sector • Four main Trust types - REITS - Business Trusts - Energy Trusts - Power & Pipeline • By 2006, it had become a $200 billion industry

  7. October 31st 2006 • “Tax Fairness Plan” applied to all trusts by Dec31st 2010 • Reduce tax avoidance & tax burden and increase Canadian government revenues - Loss of $300 federal taxes annually - Loss of $300 provincial taxes annually • Income Trust index plunged 20%

  8. Income Trusts Today

  9. Implications of Conversion Does it affect all Income Trusts? • Real estate income trusts and mutual fund income trusts are not affected. Will the Payouts change? • Payouts to shareholders will be taxed at a 34% rate (31.5% starting in 2011) at the corporate level. • Corporations will reduce their payout to account for the corporate taxes. Will the prices of these securities dip? • Current prices have the cost of the conversion built into it. Benefits of the conversion? • Flexibility of issuing shares more easily – like a corporation.

  10. Energy Trusts

  11. Energy Trusts • Set up as a royalty trusts; royalties from production are distributed as dividends • Profits are not taxed at the corporate level • Key Driver is the Prices of Oil and natural gas

  12. S&P 500 vs Capped Energy Trust (1yr)

  13. S&P 500 vs Capped Energy Trust (5yr)

  14. Income Trust vs Energy Trust (1-yr)

  15. Income Trust vs Energy Trust (5-yr)

  16. Oil

  17. Petroleum Value Chain • Upstream • Exploration and Production • Midstream • Pipeline, Transportation, Storage • Downstream • Refining, Marketing, Retailing

  18. Oil Price Trend Price of Oil Dow Jones vs. Oil Price

  19. Oil Price Trend

  20. Crude Oil Uses • Bitumen for roads • Roofing  • Fuel for ships and factories • Lubricating oils, waxes, polishes • Diesel fuel • Jet fuel • Petrol • Chemicals • Liquefied petroleum gas • Others include plastics (Ethylene and propylene), …

  21. Proven Oil Reserves

  22. Canadian Oil & Gas

  23. Canadian Oil & Gas • Main production occurs in Alberta ; Primarily in upstream operations • Seventh largest oil producing country • In 2009, it produced an average of 2.75M b/d • - 45% conventional crude oil • - 49.5% bitumen from oil sands • - 5.5% natural gas wells • 1.7M b/d (65%) , was exported to USA

  24. Canadian Conventional Oil Reserves • Six billion barrels of oil located outside the oil sands • - Alberta 39% • - Newfoundland 28% (offshore ) • - Saskatchewan 27% • Offshore Newfoundland and Labrador transport crude oil to markets by tanker. • In Western Canada, oil is transported by pipelines from the production facility to refineries where it is upgraded into gasoline, heating oil and jet fuel.

  25. Conventional Oil & Extraction • Refers to light, medium and heavy hydrocarbons • Light oil can flow naturally to the surface • - extracted from the ground using pumpjacks. • Pumpjacks are also used to remove heavy oil from the ground. • Cheaper to produce. $5-10/barrel

  26. Unconventional Oil

  27. Oil Sands (Heavy Oil) • Oil Sands: Combination of clay, sand, water, and bitumen • Extracting Bitumen from tar sands is more complex than conventional oil recovery. • Strip mining or open pit techniques, or the oil is extracted by underground heating with additional upgrading.

  28. Separating the Bitumen • Oil sands recovery processes include • extraction and separation systems • Separate bitumen from the clay, sand, and water that make up the tar sands. • Bitumen also requires additional upgrading • before it can be refined. • Dilution with lighter hydrocarbons to make it transportable. • 75% bitumen recovery. Process is water and energy intensive. • Additional $20/barrel to upgrade the bitumen

  29. Methods of Extraction – Strip Mining • Surface Mining: Approximately $27/barrel (includes primary bitumen extraction) • Just 10 - 20 per cent of the oil sands are recoverable through open-pit mining. • Use large hydraulic and electrically powered shovels to dig up tar sands and load them into trucks that can carry up to 320 tons of tar sands per load. • 2 tons of oil sands = 1 barrel of oil

  30. In Situ Methods of Extraction • In situ techniques apply heat or solvents to heavy oil reservoirs beneath the earth. Bringing it to the surface through pipes • Ones which work best in the oil sands use heat. Steam injection has been the favoured method • In situ methods are more expensive; approx $36-$40/ barrel to break even . • These techniques include; •   -steam injection (Cyclic Steam Stimulation) • - solvent injection • - firefloods • Some of these extraction methods require large amounts of both water and energy (for heating and pumping). • SAGD – Steam Assisted Gravity Drainage

  31. Oil Sand Projects

  32. Future for Oil in Canada

  33. Natural gas

  34. Natural Gas • Natural gas when burned it gives off energy with few emissions. • Found in deposits that are 1 to 2 miles below the earth's crust. • Consists primarily of methane, but includes ethane, propane, butane and pentane • Before natural gas can be used as a fuel, it must undergo processing to remove almost all materials other than methane We require energy constantly, to heat our homes, cook our food, and generate electricity. It is this need for energy that has elevated natural gas to such a level of importance in our society, and in our lives.

  35. Uses for Natural Gas Natural gas has many uses, residentially, commercially, and industrially • Furnaces • Water Heaters • Stoves/Ranges • Transportation • Heavy-duty service vehicles • Input to manufacture pulp and paper, metals, chemicals, stone, clay, glass • Process certain foods. • Treat waste materials There are over 120,000 natural gas vehicles operating on American roads.

  36. Natural Gas Reserves

  37. Natural Gas Production

  38. Natural Gas Price Trend

  39. Types Natural Gas

  40. Unconventional Forms of Natural Gas • Hydraulic fracturing is the process of pumping a fluid or a gas down a well, many hundreds or thousands of metres below ground, • The pressure this creates causes the surrounding rock to crack, or fracture • When the pumping pressure is relieved, the water disperses leaving a thin layer of the sand to prop open the cracks • This layer acts as a conduit to allow the natural gas to escape from tight formations and flow to the well so that it can be recovered

  41. Canadian Natural Gas & Outlook • Canada is the world’s third largest producer; average annual production of 6.4 trillion cubic feet • Producing regions are concentrated primarily in the western provinces (B.C., Alberta and Saskatchewan) • - offshore fields in Canada’s Maritimes • - minor production in Ontario and Northern Canada.

  42. Transportation

  43. Transportation • Pipelines are necessary to transport raw materials from their source to refineries and gas processing facilities and then to market. • Pipelines provide a safe, economical and constant flow of crude oil, natural gas and petroleum products • Cheaper than shipping and driving • 580,000 km of pipeline in Canada • 2.7 million barrels of crude oil per day travel through Canada’s crude oil pipeline network. • 15.1 billion cubic feet of natural gas per day travel through Canada’s natural gas pipeline network. • Revenues are generated from various type of usage contracts, example “take-or-pay” contracts

  44. Transportation • Pipeline costs depend on factors such as: • -type of pipe • -type of coating • -length of pipeline • -diameter of pipe • -Environment and • -terrain • Cost calculations based on cost per pipe diameter per distance to estimate pipeline project costs. • For example, $1,000 per millimetre diameter per kilometre. A 50-kilometre system consisting of 50 millimetre pipe may be roughed out as: • 50 millimetres x 50 kilometres x $1,000 per kilometre = $2.5 million/km

  45. Transportation • Pipeline success fundamentally dependent on oil demand/price • Key Factors: • Human resources intensive • Capital intensive • Highly regulated • Short Term Outlook: • - pipeline growth to the west coast. Serve Asian demand • Long Term Outlook: • - decline as alternative energies are sought

  46. Company Snapshot

  47. 18-Month Total Return

  48. 1 year Vs. S&P Capped Energy Trusts