Denny Thurston/Getty Images/iStockphoto
After struggling through 2014, a handful of energy companies that sought to recreate the income trust business model by operating U.S. assets are now among the hardest hit by the collapse in oil prices.
Parallel Energy Trust said on Thursday that it halted drilling until further notice and slashed its monthly cash distribution – a key draw for investors – by 60 per cent, to 1 cent per unit.
The company took the drastic steps while scrapping its November financial and operating targets for 2015, blaming the downdraft in crude prices to well below $50 (U.S.) per barrel. It had formulated the previous budget assuming oil prices of $70-$80 a barrel.
Now, production from its U.S. Midcontinent-region properties is slated to average 6,800 barrels of oil equivalent a day in 2015, down from its last target of 7,100.
Chief executive Rick Alexander said Parallel's staff is also cutting back on travel, and its managers and board have agreed to 20-per-cent pay cuts to help reduce overhead by 15 per cent.
The stock sank 7 per cent on the Toronto Stock Exchange on Thursday. It has skidded more than 80 per cent in the past year.
Parallel, as well as Eagle Energy Trust and Argent Energy Trust, were created to take advantage of a loophole in the tax code following Ottawa's removal in the last decade of tax advantages that made the investment vehicles wildly popular with investors.
The government of Prime Minister Stephen Harper announced the change in 2006 to stem a tide of conversions of corporations into trusts, a situation that threatened to severely cut federal tax revenues.
Despite the crackdown, trusts could keep paying out major portions of cash flow to investors in the form of distributions, if the cash flow was generated by foreign assets.
In the past year, however, the trusts have been hit hard as U.S. operating costs climbed, as did their cost of capital in Canada. In addition, they found themselves in competition for investor interest against a new breed of high-yielding Canadian junior oil companies, such as Whitecap Resources Ltd. and Surge Energy Corp., the so-called "divcos." Then oil prices sank to six-year lows, squelching cash flows.
In December, Eagle changed its strategy, acquiring Alberta oil assets for $100-million. The purchase followed the sale of the company's Permian Basin properties in Texas. Eagle's shares are down 79 per cent in the past year.
Argent, which has lost 92 per cent of its value in the same period, put itself on the auction block in October. It hired BMO Nesbitt Burns to aid its search for strategic alternatives, after conceding that its initial plans for double-digit yield and growth would not pan out.
In December it halved its 2015 capital spending budget and cash distribution, but even then its revision was based on U.S. benchmark oil averaging $67 a barrel.
Because Parallel's wells have low production decline rates on average, it has the option to suspend drilling without a massive drop in output, said spokesman Curtis Pelletier.
"We're positioning ourselves for the worst – the toughest times. We're reducing costs," Mr. Pelletier said. "We're doing everything we can so that we can weather the storm here in the immediate and near term, with the intent that if pricing improves, because of the quality of our assets, we won't take nearly the hit that a peer would."