Broken Trust: Energy companies

Energy investors were likely the most shocked and angered when Ottawa pulled the plug on income funds six years ago. In oil and gas alone, there were 31 trusts and income funds with market capitalization of more than $83 billion.

The format was wildly popular among investors who craved yield but were also ticked off after years of investing in oil and gas companies and getting little or no cash return.

After Flaherty wielded his cleaver, however, trusts soon emerged from the grave in another form as oil and gas funds converted to common stock companies sporting high dividends. Absent the tax breaks flowing from the trust structure, the new companies offered a lower yield, but an enhanced tax credit on dividends helped make up much of the difference.

We looked at a selection of 10 of these dividend-heavy producers and found yields this week ranging from 4.9 percent for ARC Resources Ltd. (ARX-T) to 8.2 percent for Pengrowth Energy. (PGF-T)

But how have the new dividend-heavy energy producers done versus the oil and gas stock index as a whole?

We crunched their total returns over the five years to Tuesday’s close and found that they ranged from a miserable total loss of 58 percent for PetroBakken Energy (PBN-T) to a massive 235 percent return for Baytex Energy Corp. (BTE-T)

Overall, we found that our 10 dividend-rich companies produced a median return of 25 percent, far in advance of the miserable total loss of 5 percent produced by the stocks in the S&P/TSX Capped Energy index as a whole. So Flaherty may have disrupted the sector but the companies that adapted -- perhaps because having to pay out a regular dividend imposes discipline on management -- have produced a pretty decent payoff for investors.

I’ll have more on this at Business Day at 10.30 a.m. ET.

At 11.50 a.m. ET on Commodities, we’ll talk to Keith Schaefer, editor of Oil and Gas Investments Bulletin, about the new breed of energy trust, which owns assets in the United States, but trade on the TSX.

And at 3.10 p.m. ET, on Business Day PM, we’ll ask Jeremy Kaliel, analyst, CIBC World Markets, if high-yielding energy companies can really maintain their payouts.