While many feared the coming income taxes on Canadian royalty income trusts would drive them out of the M&A marketplace, one year later RITs are alive and active, says Alan Tambosso, president of Calgary-based M&A advisor Sayer Energy Advisors.

The new tax law was proposed in 2006 and will take effect with the 2011 tax year.

RITs will continue to phase out during the next three years as the new tax law takes effect, Tambosso says, but "in spite of the initial concerns regarding the impact of the announcement on the industry, it appears that the M&A component of the oil and natural gas business will continue to evolve and will survive in a future without RITs," he says.

Although the value of transactions involving the royalty trusts is down, they have been active acquirers in 2007. Since the tax announcement, 18 trusts have announced asset and corporate acquisitions.

"The M&A market is not dead," says Tambosso. "It is still active and RITs are still in it. As they evolve out, they will continue to be an acquirer of assets."

Crescent Point Energy Trust bought Bakken players in southeastern Saskatchewan, and Canetic Resource Trust, Enterra Energy Trust, Fairborne Energy Trust, NAL Oil & Gas Trust and Provident Energy Trust bought public or private corporations in the past 12 months.

"Many of the purchases by RITs were clearly designed to assist with the future conversion of the RIT to a conventional E&P structure. Other transactions were acquisitions accretive to the ongoing business of the RIT," he says.

Since the announcement, C$39.5 billion worth of deals have been completed or announced, already surpassing the year-end totals for every year since 2001. These assets were "gobbled up by industry players that were not adversely impacted by the announcement."

About 30,000 barrels of oil equivalent of daily production were on the market recently. Tambosso believes a large amount of assets are being quietly marketed.

"It is likely that the total of all product currently available, including quiet sales, is still close to 100,000 barrels of oil equivalent per day, a mark that persisted prior to the announcement."

Seven RITs have disappeared or will disappear this year, but four that exited were purchased by other RITs in a continuation of the consolidation of the sector that began prior to the announcement, and a fifth announced a return to its former corporate structure.

RITs leaving the scene in the past year include Canetic, Fairborne, PrimeWest Energy Trust, Shiningbank Energy Income Fund, Sound Energy Trust, Thunder Energy Trust and Vault Energy Trust.

The most notable, according to Tambosso, are Thunder and PrimeWest, as each was bought by a non-trust private entity. Thunder was purchased by a partnership led by Overlord Financial Inc. PrimeWest was purchased by Taqa North Ltd., a subsidiary of UAE-based Abu Dhabi National Energy Co.

However, since the Thunder transaction, "the threat of other private hedge funds or pension funds acquiring RITs has subsided, likely due to the meltdown of the subprime mortgage market."