In June of 2012, we added Eagle Energy Trust to our High-Yield Pool that we manage and which is a part of the McIver/Jasayko Model Portfolios. It has been a bit of a roller- coaster ride in the units of the Trust. The most challenging period was a cut in distributions and some operational concerns which hit the news in the autumn of last year.
About a month and a half after we had invested in Eagle, another similar foreign income trust named Argent was launched. At least we now had the potential for some comparable metrics. The main difference was that the new Trust had less history and, as a result, it was a little more of an unknown quantity.
The attractiveness of the foreign income trust structure is that it reintroduced Canadian investors to the potential for relatively high flow-through income that was once a feature of the domestic income trusts, an enormous fad that met its demise when legislation was changed to nullify their advantages. The main stipulation of the new trusts is that the income had to be from a foreign source. And, there was no motivation for the Canada Revenue Agency to fight their formation since their existence represented a net increase in the amount of total taxation whereas the old domestic income trusts ended up cannibalizing much of the existing corporate and personal tax revenue.
Since Eagle’s challenges late last year, it has quietly recovered to draw even with Argent again in terms of price and yield (see the chart above). Again, the benefit of Eagle is a longer track record. More of its laundry has been revealed. However, Argent is still considered an attractive investment by many brokerage firm analysts.
The business plans of Eagle and Argent have the potential for pitfalls because of the lack of critical mass and the lack of operational diversification. Their businesses are focused because the overall size of both companies is relatively small compared to the larger energy producers. There is always a chance that either can get tripped up by one or two issues. Hence, they high current yields which serve to compensate for these risks (both are near 12.5%).
And, now that the two are in a relative dead heat again in terms of price and yield, it will be an interest race to follow going forward.
Eagle Energy Trust is held and Argent Energy Trust is not held in the McIver-Jasayko Model Portfolios as of November 6, 2013. Comments about these investments are not intended as advice and do not constitute a recommendation to buy, sell, or hold.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.
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