Royalty trust
Encyclopedia
A royalty trust is a type of corporation
, mostly in the United States or Canada, usually involved in oil and gas
production or mining
. However, unlike most corporations, its profits are not taxed at the corporate level provided a certain high percentage (e.g. 90%) of profits are distributed to shareholder
s as dividend
s. The dividends are then taxed as personal income. This system, similar to real estate investment trust
s, effectively avoids the double taxation
of corporate income.
or natural gas
wells, the mineral rights of wells, or mineral rights on other types of properties. An outside company must perform the actual operation of the oil or gas field, or mine, and the trust itself, in the United States, may have no employees. Shares of the trust generally trade on the public stock markets, but the trust itself is typically overseen by a trust officer in a bank.
They are a powerful investment
tool for people who wish to invest directly in extraction of petroleum or mining of other materials, but who do not have the resources or risk-tolerance to buy their own well or mine. Additionally, since trusts often own numerous individual wells, oil fields, or mines, they represent a convenient way for the average investor to diversify investments across a number of properties. Also, since commodities are considered a hedge against inflation, the popularity of royalty trusts as investments rises as interest rates rise, and their shares often rise as a result.
These trusts often attract investors with their relatively high yields; in 2007, their distributions were often in the 10 to 15 percent annual range. This makes the share
s sensitive to interest rate
s, as share prices are likely to decline in periods of rising interest rates, and to rise when interest rates fall. Additionally, royalty trusts in the United States and Canada usually involve oil and gas fields or mines which are at or past their production peak, and will gradually decline in output as well as revenue; however, the infrastructure to develop them has already been built, so that an investor can expect a reasonably steady income stream.
In addition to allowing investors to achieve high distribution returns, especially during periods of low interest rates, royalty trusts allow investors to speculate directly on commodities such as gas, oil, or iron ore without having to buy futures contracts, or use the other investment vehicles traditionally associated with commodities – since the trusts trade like stocks. During times when a commodity price is rising, the share value as well as the dividend return of a trust engaging in production of that commodity will rise as well.
and the United States
; there is also one in Germany. Canadian royalty trusts, called "Canroys" or "CanRoys," typically trade on the Toronto Stock Exchange
, while some of the larger trusts also trade on the New York Stock Exchange
. Canroys usually offer higher yields than U.S. trusts; for non-Canadian investors, this higher yield is reduced by the 15% foreign tax withholding that is absent in the U.S. trusts.
The most significant difference between Canadian and U.S. royalty trusts involves their legal status in their respective countries. In the U.S., trusts are not allowed to acquire additional properties, once they are formed. Since they are restricted to their original properties – for example, a group of oil fields or natural-gas-bearing rock formations – they can be expected to be depleted over time, the royalties they pay out will correspondingly decline, and eventually the trust will be dissolved. In Canada, trusts may be actively managed, and run as businesses. They may have employees, issue new shares, borrow money, acquire additional properties, and may manage the resources themselves.
The tax status of Canadian trusts is to change in 2011, according to a proposal made by Jim Flaherty
, the Canadian Finance Minister on October 31, 2006. Commencing in 2011, trusts would be taxed like all other corporations, at the full 31.5% rate; this would remove the advantage for which they were set up in the first place. Share prices of the trusts dropped immediately after the announcement, which was dubbed the "Halloween Massacre." What prompted the move was that the trusts were costing the Canadian government upwards of $500,000,000 each year in lost revenue.
. Through royalty trusts, he was able to substantially decrease his amount of effective reserves and avoid the difficulty of replenishing them.
HTE sold to Korea National Oil 2009
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, mostly in the United States or Canada, usually involved in oil and gas
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
production or mining
Mining
Mining is the extraction of valuable minerals or other geological materials from the earth, from an ore body, vein or seam. The term also includes the removal of soil. Materials recovered by mining include base metals, precious metals, iron, uranium, coal, diamonds, limestone, oil shale, rock...
. However, unlike most corporations, its profits are not taxed at the corporate level provided a certain high percentage (e.g. 90%) of profits are distributed to shareholder
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
s as dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s. The dividends are then taxed as personal income. This system, similar to real estate investment trust
Real estate investment trust
A real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors...
s, effectively avoids the double taxation
Double taxation
Double taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
of corporate income.
Characteristics of royalty trusts
Royalty trusts typically own oilPetroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
or natural gas
Natural gas
Natural gas is a naturally occurring gas mixture consisting primarily of methane, typically with 0–20% higher hydrocarbons . It is found associated with other hydrocarbon fuel, in coal beds, as methane clathrates, and is an important fuel source and a major feedstock for fertilizers.Most natural...
wells, the mineral rights of wells, or mineral rights on other types of properties. An outside company must perform the actual operation of the oil or gas field, or mine, and the trust itself, in the United States, may have no employees. Shares of the trust generally trade on the public stock markets, but the trust itself is typically overseen by a trust officer in a bank.
They are a powerful investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
tool for people who wish to invest directly in extraction of petroleum or mining of other materials, but who do not have the resources or risk-tolerance to buy their own well or mine. Additionally, since trusts often own numerous individual wells, oil fields, or mines, they represent a convenient way for the average investor to diversify investments across a number of properties. Also, since commodities are considered a hedge against inflation, the popularity of royalty trusts as investments rises as interest rates rise, and their shares often rise as a result.
These trusts often attract investors with their relatively high yields; in 2007, their distributions were often in the 10 to 15 percent annual range. This makes the share
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
s sensitive to interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s, as share prices are likely to decline in periods of rising interest rates, and to rise when interest rates fall. Additionally, royalty trusts in the United States and Canada usually involve oil and gas fields or mines which are at or past their production peak, and will gradually decline in output as well as revenue; however, the infrastructure to develop them has already been built, so that an investor can expect a reasonably steady income stream.
In addition to allowing investors to achieve high distribution returns, especially during periods of low interest rates, royalty trusts allow investors to speculate directly on commodities such as gas, oil, or iron ore without having to buy futures contracts, or use the other investment vehicles traditionally associated with commodities – since the trusts trade like stocks. During times when a commodity price is rising, the share value as well as the dividend return of a trust engaging in production of that commodity will rise as well.
Canadian versus U.S. royalty trusts
Royalty trusts are found mainly in CanadaCanada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
and the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
; there is also one in Germany. Canadian royalty trusts, called "Canroys" or "CanRoys," typically trade on the Toronto Stock Exchange
Toronto Stock Exchange
Toronto Stock Exchange is the largest stock exchange in Canada, the third largest in North America and the seventh largest in the world by market capitalisation. Based in Canada's largest city, Toronto, it is owned by and operated as a subsidiary of the TMX Group for the trading of senior equities...
, while some of the larger trusts also trade on the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
. Canroys usually offer higher yields than U.S. trusts; for non-Canadian investors, this higher yield is reduced by the 15% foreign tax withholding that is absent in the U.S. trusts.
The most significant difference between Canadian and U.S. royalty trusts involves their legal status in their respective countries. In the U.S., trusts are not allowed to acquire additional properties, once they are formed. Since they are restricted to their original properties – for example, a group of oil fields or natural-gas-bearing rock formations – they can be expected to be depleted over time, the royalties they pay out will correspondingly decline, and eventually the trust will be dissolved. In Canada, trusts may be actively managed, and run as businesses. They may have employees, issue new shares, borrow money, acquire additional properties, and may manage the resources themselves.
The tax status of Canadian trusts is to change in 2011, according to a proposal made by Jim Flaherty
Jim Flaherty
James Michael "Jim" Flaherty, PC, MP is Canada's Minister of Finance and he has also served as Ontario's Minister of Finance. From 1995 until 2005, he was the Member of Provincial Parliament for Whitby—Ajax, and a member of the Progressive Conservative Party caucus...
, the Canadian Finance Minister on October 31, 2006. Commencing in 2011, trusts would be taxed like all other corporations, at the full 31.5% rate; this would remove the advantage for which they were set up in the first place. Share prices of the trusts dropped immediately after the announcement, which was dubbed the "Halloween Massacre." What prompted the move was that the trusts were costing the Canadian government upwards of $500,000,000 each year in lost revenue.
History of royalty trusts
Oklahoma businessman T. Boone Pickens created the first royalty trust in 1979 in response to the difficulty that Mesa Petroleum was having in replenishing its oil reservesOil reserves
The total estimated amount of oil in an oil reservoir, including both producible and non-producible oil, is called oil in place. However, because of reservoir characteristics and limitations in petroleum extraction technologies, only a fraction of this oil can be brought to the surface, and it is...
. Through royalty trusts, he was able to substantially decrease his amount of effective reserves and avoid the difficulty of replenishing them.
Publicly-Traded Royalty Trusts
- Baytex Energy Trust (Canada: oil and natural gas)
- BP Prudhoe Bay Royalty TrustBP Prudhoe Bay Royalty TrustThe BP Prudhoe Bay Royalty Trust is a United States oil and natural gas royalty trust based in New York, New York. With a market capitalization of US$ 1.6 billion in early 2008, and an average trading volume of 121,000 shares, BP Prudhoe Bay Royalty Trust is the largest conventional oil and gas...
(US: Prudhoe Bay oil field, Alaska) - Canadian Oil Sands TrustCanadian Oil Sands TrustCanadian Oil Sands Limited is a Canadian company that generates income from its oil sands investment in the Syncrude Joint Venture. Syncrude operates an oil sands facility and produces crude oil through the mining of oil sands from ore deposits in the Athabasca region of northern Alberta,...
(Canada: oil sands) - Cross Timbers Royalty Trust (US: Texas, Oklahoma, New Mexico: oil and gas)
- Daylight Resources Trust Ltd. (Canada: oil and natural gas)
- Dominion Resources Black Warrior Trust (US: Alabama, mainly natural gas)
- Enerplus Resources FundEnerplus Resources FundEnerplus Corporation was established in 1986 and is one of Canada’s oldest and largest independent oil and gas producers offering investors a high yield combined with moderate, profitable growth potential from resource plays across Western Canada and the United States.Enerplus Corporation trades...
(Canada: oil and natural gas; properties both in Canada and the U.S.)- Hugoton Royalty Trust (US: Kansas, Oklahoma, Wyoming; natural gas)
- Marine Petroleum Trust (US: Gulf of Mexico; oil and gas)
- Mesabi Trust (US: Minnesota, iron ore)
- Mesa Royalty Trust (US: oil)
- MV Oil Trust (US: oil)
- North European Oil Royalty Trust (Incorporated in the US, but the oil-producing properties are in Germany)
- Permian Basin Royalty TrustPermian Basin Royalty TrustThe Permian Basin Royalty Trust is a United States oil and natural gas royalty trust based in Dallas, Texas. With a market capitalization of US $790,000,000, and an average daily trading volume of about 186,000 shares at the end of 2007, it is one of the largest royalty trusts in the United States...
(US: Texas, oil and gas) - Penn West Energy TrustPenn West Energy TrustPenn West Exploration is a Canadian oil and natural gas company based in Calgary, Alberta, one of the S&P/TSX 60, the sixty largest companies on the Toronto Stock Exchange. Until the end of 2010 it was one of the companies known as "Canroys"...
(Canada: oil and gas) - Pengrowth Energy TrustPengrowth Energy TrustPengrowth Energy Corporation is a Canadian oil and natural gas company based in Calgary, Alberta. Established in 1988 by Calgary entrepreneur James S Kinnear, it was one of the largest of the Canadian royalty trusts , with a market capitalization of US$ 4.12 billion at the end of 2007...
(Canada: oil and gas, including oil sands) - Precision Drilling Trust (Canada: drilling contractor to the oil and gas industry)
- Provident Energy Trust (Canada: oil and gas; properties both in Canada and the US)
- Sabine Royalty Trust (US: Florida, Louisiana, Mississippi, New Mexico, Oklahoma, Texas; oil and gas)
- San Juan Basin Royalty Trust (US: New Mexico, mainly natural gas)
- Sandridge Mississippian Royalty Trust (US: Gulf of Mexico, oil and gas)
- TEL Offshore Trust (US: Gulf of Mexico offshore of Louisiana; oil and gas)
- Tidelands Royalty Trust B (US: Gulf of Mexico, oil and gas)
- Torch Energy Trust (US: Louisiana, Alabama, Texas; mainly natural gas)
- Williams Coal Seam Gas Royalty Trust (US: New Mexico and Colorado, natural gas)
Former Publicly-Traded Royalty Trusts, now liquidated
- Santa Fe Energy Trust (originally traded on NYSE under the symbol SFF) (US: oil and gas in 12 states; trust liquidated in 2008)
- LL&E Royalty Trust (original NYSE symbol LRT; Pink SheetsPink SheetsOTC Markets Group, Inc., informally known as "Pink Sheets", is a private company that provides services to the U.S. over-the-counter securities market including electronic quotations, trading, messaging, and information platforms. According to the U.S. Securities and Exchange Commission, OTC...
symbol LRTR) (US: Florida, Alabama, and in the Gulf of Mexico; oil and gas); the trusteeTrusteeTrustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
sought to liquidate the trust at December 31, 2010, but unitholders sued to attempt to prevent this.
HTE sold to Korea National Oil 2009
Private Energy Income Trusts
- Petrocapita Income Trust (Canada: western Canada, oil)
See also
- Investment trustInvestment trustAn Investment trust is a form of collective investment found mostly in the United Kingdom. Investment trusts are closed-end funds and are constituted as public limited companies....
- Income trustIncome trustAn income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. The trust can receive interest, royalty or lease payments from an operating entity carrying on a business, as well as dividends and a return of capital.The main attraction of income...
- Real estate investment trustReal estate investment trustA real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors...
- Mutual fund trustMutual fund trust-Definition:A mutual fund trust is a unit trust in which all holdings and transactions in the units comply with the prescribed conditions governing: the number of unit holders; the dispersal of ownership of the units: and public trading of the units....