The Canadian royalty income trust (RIT) sector is a growing business-total equity value at year-end 2004 was C$120 billion; now it is C$170 billion. But has it become too big? A trust's reserve life is the leading indicator of its sustainability, and the average decline rate of Canadian trusts' production in western Canada is 20% a year, according to Randall Findlay, president of Calgary-based Provident Energy Trust. Opportunities in the U.S. offer a decline rate of between 6% and 8%. Competition in Canada for reserves has made some trusts turn to the U.S. for growth, Findlay said at the IPAA's OGIS-West conference in San Francisco. Provident ventured south of the border first among its peers, buying California-focused BreitBurn Energy and its long-lived oil reserves in the summer of 2004. Other trusts are looking for growth in the U.S. too, Findlay said. "We know others are there. We can see their fingerprints in the dataroom...They're coming." They will make acquisitions when they find an opportunity that includes a good management team and an economic tax structure, as Provident did in BreitBurn, he added. Another way for RITs to grow in a tight asset marketplace is consolidation. Provident was the 11th Canadian RIT. Now it is among 37. "And, it's the same Western Canadian Basin. It hasn't gotten any bigger," he said. The basin has become expensive. "We've driven it up." Provident's reserve life is No. 2 at about 13 years, behind that of Enerplus at about 14 years, he added. The number of and competitiveness among RITs is making sustainability questionable. But Canadian legislators may not be able to undo what they have created from tax legislation that supported the RIT structure. "The genie is out of the bottle...It's too late to put it back in." Canadian voters who are invested in RITs will continue to expect their monthly distribution checks. Some 80% of trusts units are currently held by retail investors, mostly in regular retirement and other accounts. Nearly 50% of unit-holders are older than 50 years. Trust managers are reminded of their obligations to investors monthly-they distribute profits monthly. "If you're not distributing cash every month, the transparency catches people's attention."
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