Loan Articles

Commodity investing is once again a hot topic. Commodity investing can be problematic. Commodities are often extracted in unstable places. Holding commodities can be expensive and inconvenient. Finally commodity investments are often long term and risky investments.

Canadian Energy Trusts get around these problems. Firstly Canada is one of the best run democracies in the world, and is not prone to nationalising wealth generating companies. Secondly the holdings are as tradable and liquid as stocks or mutual funds, and unlike futures contracts they don‘t run out. Finally Energy Trusts are designed to produce income, most of the prospecting and investment has already been done.

What are Canadian Energy Trusts?

Canadian Energy Trusts, also known as Canadian Resource Trusts or Canadian Royalty Trusts are investment trusts that are backed by oil or gas properties rather than stocks or real estate. Because they are investment trusts they are quoted on a stock exchange, often the Toronto Stock Exchange, although some of the bigger ones are quoted on the New York Stock Exchange.

The income they pay derives from the sales of commodities that they extract. As they tend to be holding the more mature fields then they tend to generate a lot of income and most of the infrastructure has already been developed. This means that they tend to have very high yields, historically around 15% of the underlying investment.

They also tend to be predictable - especially in comparison with other commodity investments - as they are in areas where production is already well established and reserves are well known.

Canadian Energy Trusts as a half way house

Canadian energy trusts are historically a safe income generating investment. In many ways they still are. However there is now a speculative edge to them which may mean that there could be some real value.

Unlike US trusts, Canadian Energy Trusts can do more than manage existing properties. They can buy or develop new properties with borrowed money and so are not restricted to mature fields.

Unlike the oil corporations they don’t tend to aggressively develop new fields or explore for oil. This means they are a half way house between actively managed resource businesses and the pure income trust model.

Canada has no security concerns

When the world is peaceful it doesn’t really matter where you get the oil from. However we don’t live in a peaceful world. As well as being a long established democracy, Canada’s border with the United States is the longest land border in the world, and the US is historically the world’s largest consumer of energy. There are no shipping lanes, no unstable governments and no terrorists to worry about.

When you can’t get the oil to market it doesn’t matter if the oil is in the ground. With Canada this will never be a problem.

Why you should look at Canadian Energy Trusts

Canadian energy trusts are a way of betting on rising energy prices without political instability, the inconvenience of storage or the risks inherent in exploration and futures contracts.