Provident Energy Trust Offers Attractive Dividend

• The Company: Provident Energy Trust, a Calgary-based energy income trust.
• The Filing: FORM 40-F filed with the SEC on March 28, 2008.
• The Finding: Based on the current annualized distribution rate of $1.20 a share, Provident Energy Trust offers an attractive dividend yield of approximately 20 percent. In addition, much of the income being generated from the company’s oil and gas properties would be effectively sheltered from the proposed legislation by the Canadian government, Budget Implementation Act (Bill C-52), until 2016.

The Upshot: This controversial bill seeks to tax publicly traded royalty income trusts, such as Provident. The new legislation limits the tax deductibility of cash distributions, such that trusts can no longer avoid corporate taxes by distributing (at least 90 percent of) their operating income directly to owners (stockholders). As a result of this bill, Provident and other energy income trusts would pay taxes at the same rate as other corporations, starting in 2011.

Despite the current environment of lower energy prices and the potential fallout from Bill C-52, the outlook for the sustainability of Provident’s dividend payout remains upbeat. The company has approximately $1.5 billion in tax pools available to claim against taxable income, which management estimates could shield its cash flows produced by current Canadian oil and gas operations until after 2016.

The Question: Given the significant erosion in energy prices and the implications on development and exploration activities, might the Canadian government rethink its position of changing the income trust tax code?