Canadian Energy Trusts

1. Canadian Energy Trusts Tina Chen Hardeep Gill AmandeepHundal Bus 417 10-1

2. Income trusts • Stock symbols ending with ‘.UN’ • Structured to own debt and equity, or royalty in revenues of an underlying asset • Purpose: to facilitate distributions to investors on a tax-efficient basis • Adopted by businesses that require a limit amount of capital in maintaining their PPE (generate stable cash flow) • Earnings are distributed to investors each month or quarter, with yield from 6-20% a year

3. Types of Income trusts • Business Trusts • REITs • Utility Trusts • Energy/Royalty Trusts

4. Introduction to Energy Trusts • First listed in 1987; also known as Royalty Trusts • Similar to mutual funds • An integral component of the Canadian Oil and Gas Industry • Investment vehicle that may engage in the development, acquisition and/or production of oil and gas reserves

5. Introduction to Energy Trusts • A certain high percentage of profits are distributed as dividends • Profits are not taxed at the corporate level • As interest rates rise, share prices decline; as interest rates fall, share prices rise • Attract investors with relatively high yields

6. How Energy trusts work • 1.Receives royalty income from producing properties (net cash flow) • 2.Sells interest in the trust (trust units) to investors • 3.All of the cash flow generated by the oil and gas assets, net of certain deductions and based on payout ratios, is passed on to the unitholders as royalty income • In general, the largest variable in determining the level of cash flow is prices for crude oil and natural gas

7. INCOME trusts: growth

8. Types of energy trusts • American: • Not allowed to acquire additional properties once formed • Maintain existing assets • Distribute cash until their natural-resource assets are depleted • Canadian: • Allowed to be actively managed and run as businesses • Generate capital expenditures

9. Tax fairness plan • OCTOBER 31, 2006 • Creating a level playing field between income trusts and corporations. • Stop the trend of corporate tax avoidance • Stop shifting any future tax burden onto hardworking individuals and families

10. Tax fairness plan Measurement • A Distribution Tax on income trust • A reduction in corporate tax of 0.5% as of January 1, 2011 • The new tax on income trust dividends will be 29.5% in 2011 and 28% thereafter

11. S&P/TSX Capped energy Trust: 1-yr

12. S&P/TSX Capped energy Trust: 5-yr

13. energy Trust vs. income trust 1-yr

14. energy Trust vs. income trust 5-yr

15. Intro to Canadian oil and gas • Main production occurs in Alberta • Largest single source of oil imports to the USA • Seventh largest oil producing country in the world • In 2008, it produced an average of 2,750,000 b/d • 45% conventional crude oil • 49.5% bitumen from oil sands • 5.5% natural gas wells

16. Conventional Crude oil • A naturally occurring mixture of hundreds of different hydrocarbon compounds trapped in underground rock • Canada exports over 1,000,000 b/d of oil to US markets accounting for 10.9% of US oil imports • Refers to light, medium and heavy hydrocarbons • Conventional crude oil is produced by drilling wells • Cheaper to produce

17. Conventional Crude oil Price

18. Crude oil Imports and exports

19. North American oil reserves 2007

20. Oil sands • A naturally occurring mixture of sand, clay or other minerals, water and bitumen • Bitumen is a heavy and extremely viscous(“thickness”) oil that must be treated before it can be used by refineries to produce usable fuels • Can be found in several locations around the globe • Non-conventional crude oil deposits is too thick to flow in its natural state and requires special methods to bring it to the surface • More costly to produce

21. Oil sands • Mixture of sand, clay, water, and bitumen • Synthetic crude oil is extracted from oil sands and is often sold at a premium because of its high quality • More costly to produce

22. Types of oil sands • Light crude oil: liquid petroleum with gravity of 28 degrees API or higher • API gravity measures how heavy or light a petroleum liquid is compared to water • If API gravity is greater than 10, it is lighter and floats on water; if it is less than 10 it is heavier and sinks • Heavy crude oil: liquid petroleum with gravity of 28 degrees API or lower • Bitumen: petroleum in semi-solid or solid form that is found in bituminous sands. It is so heavy (gravity below 12°API) and viscous that it will not flow unless heated or diluted. • Synthetic crude oil: a product similar to a high-quality light crude oil. It is made by refining or upgrading heavy oil or bitumen. From 31-33°API

23. oil sands – resistance to flow

24. Oil sand price

25. World’s largest oil reserves 2008

26. oil Sand Resources

27. Crude oil vs. Oil sands

28. Natural gas • One of the cleanest, safest, and most useful forms of energy in our day-to-day lives • Can be found by itself or in association with oil • Colourless and odourless; a mixture of hydrocarbons • Impurities are removed before it is delivered to homes and businesses • Users: • Residential • Commercial • Industrial

29. Canadian Natural gas price

30. Natural gas reserves

31. Natural gas – Alberta hub

32. Transportation • Upstream • Exploration and production • Midstream • Pipeline, transportation and storage • Downstream • Refining, marketing, and retailing

33. Recovery Method • Open-pit mining Recovers bitumen closer to the surface (< 200 ft) Uses trucks and shovels Able to recover only 20% of oil sands • In situ drilling Recovers bitumen deeper underground (> 200 ft) Uses advanced drilling technology • directional drilling Able to recover 80% of oil sands Injects steam or solvents into the reservoir to mobilize the thick bitumen so it can be pumped to the surface • CSS • SAGD

34. Cyclic steam stimulation (CSS) • Huff & Puff method • Used at Cold Lake • Advantages: • Requires only 1 well bore • Adaptable to thinner, inter-bedded reservoirs • Disadvantages: • Lower recovery factor

35. Steam Assisted gravity drainage • Used at Athabasca • Advantages: • Higher bitumen recovery • Continuous process • Disadvantages: • Requires two wells • Requires clean, continuous reservoirs

36. Harvesting bitumen

37. Oil refinery An industrial process where crude oil is processed and refined into more useful petroleum products

38. Oil refining process Fractional distillation Conversion Treatment Combine

39. Gas and oil: trends • Declining conventional means & increasing role for non-conventional crude oil & natural gas • Technology has unlocked vast supplies of shale gas across North America • Increasing interdependence with North American markets

41. INTER PIPELINE FD CLASS’A’LTD P (IPL-UN.TO)

42. IPL – 1-yr chart

43. IPL – 1-yr vs. S&P/TSX 60 (Market)

44. IPL – 1-yr vs. S&P income trust (Industry)

45. IPL – 5-yr chart

46. IPL – 5-yr vs. S&P/TSX 60 (Market)

47. IPL – 5-yr vs. S&P income trust (Industry)

48. Company Overview • Created in 1997, Calgary, Alberta • Publicly traded Canadian limited partnership • An energy infrastructure business that provides unitholders with a stable source of monthly cash distribution • Transport petroleum and extract natural gas liquids • Operations: • Oil Sands Transportation • NGL Extraction • Conventional Oil Pipelines • Simon Storage Limited (Bulk Liquid Storage)

49. Oil Sands Transportation • Largest oil sands gathering business in Canada • Cold Lake Pipelines • Corridor Pipelines • Transport approximately 35% of the total oil sands volume (582,000 b/d) • Cold Lake Pipeline system is the sole transporter • Transport approximately 560,000 b/d of bitumen blend

50. NGL (Natural Gas Liquids) Extraction • Process pipeline quality natural gas to remove NGL (ethane, propane, butanes and pentanes-plus) • Fraction NGL stream to produce ethane product and a mix of others) • Ownership: 100% in Cochrane and Empress II plants; 50% in Empress V plant • NGL are used directly as an energy product and as a feedstock for the petrochemical and crude oil refining industries