Pengrowth deal invigorates Energy Trusts:

Pengrowth Energy has announced they will buy $1.04 billion of oil and gas assets from ConocoPhillips Co. The deal meets the proposed new rules on energy trust expansion laid out by the Federal Government. The Government has set an arbitrary limit to the expansion of an energy trust to 15% of existing equity.

The Pengrowth - ConocoPhillips deal is a mix of debt and equity with approximately 65% of the funds raised by debt financing and 35% by the issuance of equity. The additional 20 million units will add about 9% to the current equity outstanding at Pengrowth.

The additional assets will increase oil & gas production by 27% to 100,000 barrels per day and proven reserves by 22%.

The deal is the first since the October 31st announcement by the Finance Minister that income trusts will be subject to income taxes in 2011 and placed a restriction of 15% on the increase in equity by a trust. The new reality in the income trust sector is that the companies will be expanding by issuing debt and there seems to be an appetite by Canadian Banks to get involved in this new stage of expansion in the energy sector.

It seems to be business as usual in the energy trust sector unless the Government changes the rules again when they finalize the process in the next few weeks. It seems appropriate to look at energy trusts with low debt levels as the most likely to have the potential to expand and grow under the new rules. Trusts with high debt levels will be severely restricted going forward and are likely to be left behind by investors.


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