Argent Energy Trust, a Calgary-based producer of oil in Texas, fell to a record low after cutting payments to investors as Canadian foreign-asset income trusts lag energy-industry peers and come under scrutiny.
Argent plummeted 25 percent to close at C$3.52 in Toronto after dropping as much as 34 percent, the most intraday since it started trading at C$10 in August 2012.
Chief Executive Officer Brian Prokop will resign at the end of the month as Argent slashes monthly payments 77 percent to 2 cents a unit, lowers its capital program, cuts output forecasts and examines asset sales. The market doesn’t support the previous model of “double-digit” yield and growth, Argent said in a statement today.
“The board had to make some decisions to change its strategy and its direction,” said Gordon Tait, an analyst at BMO Capital Markets in Calgary, pointing to payments that were unsustainable. “It’s certainly a step in the right direction. Much will come down to operating consistency.”
Argent is among a handful of Calgary oil and natural gas producers whose income-trust structure has come under scrutiny on concern they may not be able to sustain higher-than-average dividend yields, a measure of payments to investors relative to their unit prices. They were formed in recent years to take advantage of preferred tax treatment when income distributed to holders comes from international assets.
The firms filled a void for high-yield investment options after the collapse of the nation’s C$200 billion ($183 billion) trust market when tax rules changed.
Argent has fallen 66 percent in the past year, compared with a 19 percent gain on the S&P/TSX Energy Index. Parallel Energy Trust, another income trust with foreign assets, has gained 0.9 percent, while Eagle Energy Trust was little changed.
Offering to pay investors a yield of 10 percent or higher in a capital intensive business is putting the oil producers at risk because this only works for companies that have a significant cost advantage, said John Stephenson, a portfolio manager at First Asset Investment Management Inc. in Toronto.
“You’re essentially setting up the thing to fail because you’re paying out too much,” Stephenson said. “They’re always worrisome.”
Argent had a high yield to attract investors for its initial public offering and aimed for its payout to become sustainable as it grew through acquisitions, Sean Bovingdon, Argent’s chief financial officer, said in an interview.
Argent is lowering its yield amid reduced investor demand for payments, Bovingdon said. The company is competing for investor money with peers that have recently started paying dividends at lower yields, such as Whitecap Resources Inc., Cardinal Energy Ltd. and Torc Oil & Gas Ltd., he said.
Parallel Energy has a sustainable distribution based on 2014 plans, even though its yield is higher than the industry average, because it focuses on assets with lower production declines that require less capital and can live within its cash flow, spokesman Curtis Pelletier said.
The sustainability of Eagle Energy’s payout is in line with Canadian dividend-paying peers, Chief Financial Officer Kelly Tomyn said by phone. The relative lag in Eagle Energy’s units may stem from investors associating it with the other two foreign-asset income trusts, which have higher debt, she said.
“Many investors see a yield above 10 percent as being a warning and red flag,” Pelletier said. “They have to look beyond the yield into the total payout ratio.”
The payout ratio, or sustainability ratio, measures how well payments to investors are covered by cash flow.
Meranex Energy Trust, a company that planned an initial public offering to operate as an income trust with assets in Texas, in October 2012 postponed the share sale because of unfavorable market conditions, people familiar with the plan said at the time.
The company has scheduled a conference call to discuss the news tomorrow at 11 a.m. New York time.
Argent hired Bank of Montreal to sell interests from its Eagle Ford assets located mainly in Gonzales County, Texas, according to BMO Capital Markets’ website.