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Because last year’s
bombshell that Canada would change the way it treated royalty trusts was
fraught with political risks, not only did the country’s ruling
conservatives pull it off with surprising ease at the time, they’ve
dodged all the bullets since. This
latest one, however—the announced takeover of PrimeWest
Energy Trust by Abu Dhabi’s
national oil company—may be a tougher bullet to dodge. Here’s why:
The Political Problem: shortly after
the Conservatives announced their proposed change to the royalty trusts and
the stocks got clobbered as a result, energy trust CEOs
warned that they had been made sitting ducks for acquisition by foreign
buyers. At the time, Finance Minister
Flaherty brushed off the claims as self-serving propaganda on the part of the
energy trust CEOs who opposed the tax change
proposal, but TAQA’s bid for PrimeWest—at a 30% premium—proved the trust CEOs correct.
The Conservatives’ tax law change had perhaps set the stage for
the selling of Canada’s
vital natural resources to foreign buyers.
The Political Solution: this one
clearly has the Conservatives in a quandary. At first, Prime Minister Harper
reacted swiftly, using the Middle-Eastern origin of the buyer to float the
idea of blocking the deal on national security grounds. However, this deal was TAQA’s 3rd takeover of the year in Canada, and
one of those purchases has already closed; if it wasn’t a national
security issue then, why would it be now? Since that wouldn’t make sense,
he then backed off and said such protectionist legislation would be coming
soon, but that the TAQA deal would be reviewed based on existing laws,
preserving its ability to complete the PrimeWest
deal. Even this solution
wasn’t ideal however, as it would keep the topic of the TAQA deal in
the news, reminding Canadians that the energy trusts were indeed trading at
fire-sale prices as a direct result of the change in their tax status.
Ultimately, there has been
no political solution to the PrimeWest takeover,
and this week’s announcement by Canada’s Conservatives that
no such national security takeover legislation would be crafted until next
year shows clearly they don’t quite know how to make this problem go
away. They must be hoping the
topic will die down, that they’ll have time to quietly pass such
legislation at some point in the future.
Will this work? Maybe, but the fact still remains that
the TAQA takeover of PrimeWest signaled
clearly that Canadian energy trust assets are very inexpensive. In reality, a foreign acquirer might
actually step up any similar plans in hopes of getting a deal done now,
before any new legislation that would block such foreign buyers is tabled
next year.
Regardless, the royalty
trust tax change was a huge mistake, and the lack of any clever political
play in the aftermath of the PrimeWest takeover
shows that Harper, Flaherty and their team will have an increasingly
difficult time covering up that fact.
*Note: readers can click here to listen to my podcast interview
with Roger Conrad about current energy trust valuations in
general and the PrimeWest takeover, in
particular.
Chip Hanlon
Delta Global Advisors
Phone: 800-485-1220
www.deltaga.com
Chip Hanlon focuses on foreign
equities, currencies and commodities. He is currently the president of Delta
Global Advisors, an SEC-registered investment
advisor with more than $1BB in assets under management. Previously, he was
the C.O.O. and chief U.S. strategist for Euro Pacific Capital, president of Unfunds, Inc. and vice president of investments and
syndicate director for Sutro & Co. He is also a contributing writer to Green Faucet and to
Real Money, the subscription service of thestreet.com.
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