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Enerplus Goes Corporate
Enerplus Resources Fund (NYSE: ERF) is a high-yielding Canadian oil and gas royalty trust that is in the midst of changing its asset base toward more of a growth orientation. This move is to prepare for a conversion to a corporate ownership structure beginning in 2011. The restructuring is due to a change in tax laws in Canada that take effect next year.
IN PICTURES: 4 Biggest Investor Errors
Tax Change
The Canadian government instituted a new tax on Specified Investment Flow Through (SIFT) entities beginning January 1, 2011. The tax impacts the deductibility for income tax purposes of certain types of income, and it has precipitated the change in ownership structure for many trusts in Canada.
Dividend
Enerplus currently pays an 18 cents per unit monthly distribution composed of a dividend and a non-taxable return of capital, giving a current yield of 8.8%. The company plans to continue this payout after the conversion.
Growth Areas
Enerplus has invested in the Bakken and Marcellus Shales as it shifts its strategy from mature income-producing properties to those with growth prospects.
Enerplus has more than 200,000 net acres prospective for the Bakken Shale spread across three project areas in North Dakota, Montana, and across the Canadian border in Saskatchewan. The company reported average production of 10,260 barrels of oil equivalent (BOE) per day in the second quarter of 2010 from these areas.
The Bakken is one of the more popular areas for exploration and production companies looking for growth. Kodiak Oil and Gas (NYSE: KOG) recently reported a Bakken well with an initial production rate of 1,906 BOE per day.
Enerplus is also moving into the Marcellus Shale, where the company added another 58,500 net acres in August. This brings the company's total investment here to $150 million in 2010.
Gastar Exploration (NYSE: GST) is also active in the Marcellus Shale, and the company just entered into a joint venture here with a third party to help develop its properties.
Divestitures
Enerplus just announced the sale of its lease in the Kirby Oil Sands for $405 million. The company paid $203 million for the lease in 2007, and it invested another $58 million since then to start development. Another company active in the oil sands is Devon Energy (NYSE: DVN), which just announced phase 3 of the Jackfish project in Alberta, Canada.
Enerplus has identified other non-core properties that it plans to sell, with average production of approximately 14,000 BOE per day. The company is just about halfway through these sales.
Taxation
The taxation treatment for U.S. owners of Enerplus is fairly complex. The dividend portion of this payout is considered a qualified dividend for U.S. tax purposes, according to the company. Both the dividend and the return of capital are subject to a minimum 15% Canadian withholding tax, but many taxpayers can claim a credit for this on their tax return.
Enerplus can also be held in an IRA, but distributions are subject to withholding as well, and no credit can be claimed for a foreign tax paid when the investment is held in an IRA.
Taxpayers must also adjust the cost basis of the investment based on the return of capital, and given the complexity of all this, an investor should probably consult a tax advisor before jumping into this one.
Bottom Line
Enerplus is converting to a corporate form of ownership in 2011 due to a tax change in Canada. The company is starting to make changes to its asset base to one that is more oriented toward growth. (For related reading, see An Introduction To Canadian Income Trusts.)
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IN PICTURES: 4 Biggest Investor Errors
Tax Change
The Canadian government instituted a new tax on Specified Investment Flow Through (SIFT) entities beginning January 1, 2011. The tax impacts the deductibility for income tax purposes of certain types of income, and it has precipitated the change in ownership structure for many trusts in Canada.
Dividend
Enerplus currently pays an 18 cents per unit monthly distribution composed of a dividend and a non-taxable return of capital, giving a current yield of 8.8%. The company plans to continue this payout after the conversion.
Growth Areas
Enerplus has invested in the Bakken and Marcellus Shales as it shifts its strategy from mature income-producing properties to those with growth prospects.
Enerplus has more than 200,000 net acres prospective for the Bakken Shale spread across three project areas in North Dakota, Montana, and across the Canadian border in Saskatchewan. The company reported average production of 10,260 barrels of oil equivalent (BOE) per day in the second quarter of 2010 from these areas.
The Bakken is one of the more popular areas for exploration and production companies looking for growth. Kodiak Oil and Gas (NYSE: KOG) recently reported a Bakken well with an initial production rate of 1,906 BOE per day.
Enerplus is also moving into the Marcellus Shale, where the company added another 58,500 net acres in August. This brings the company's total investment here to $150 million in 2010.
Divestitures
Enerplus just announced the sale of its lease in the Kirby Oil Sands for $405 million. The company paid $203 million for the lease in 2007, and it invested another $58 million since then to start development. Another company active in the oil sands is Devon Energy (NYSE: DVN), which just announced phase 3 of the Jackfish project in Alberta, Canada.
Enerplus has identified other non-core properties that it plans to sell, with average production of approximately 14,000 BOE per day. The company is just about halfway through these sales.
Taxation
The taxation treatment for U.S. owners of Enerplus is fairly complex. The dividend portion of this payout is considered a qualified dividend for U.S. tax purposes, according to the company. Both the dividend and the return of capital are subject to a minimum 15% Canadian withholding tax, but many taxpayers can claim a credit for this on their tax return.
Enerplus can also be held in an IRA, but distributions are subject to withholding as well, and no credit can be claimed for a foreign tax paid when the investment is held in an IRA.
Taxpayers must also adjust the cost basis of the investment based on the return of capital, and given the complexity of all this, an investor should probably consult a tax advisor before jumping into this one.
Bottom Line
Enerplus is converting to a corporate form of ownership in 2011 due to a tax change in Canada. The company is starting to make changes to its asset base to one that is more oriented toward growth. (For related reading, see An Introduction To Canadian Income Trusts.)
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by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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