National Post, Saturday, April 3, 2004

Barbara Betanski is bullish on the long-term prospects for oil and gas. Very bullish. But it's a "tricky time" for oil-patch investors, she says as we settle into a corner table in the far reaches of the big new Keg Restaurant and Bar in the Bay Street financial district. 

And that's particularly true for those buying units in oil and gas royalty trusts, adds the Desjardins Securities analyst as she outlines concerns stemming from the recent federal budget, the high price of oil, the continuing high valuations for royalty trusts and the lower yields on them. "By any measure of traditional valuations, oil and gas trust valuations are extremely high." 

There's nothing tricky about The Keg, which also happens to be an income trust. By all accounts, this flagship location has been a huge success among the Bay Street crowd. They have taken to the relatively low prices and high value, the friendly Keg service and atmosphere, and the sleek surroundings, with TGIT business especially brisk and boisterous after work on Thursday, which is the new Friday. The only way to generate more traffic on the finance-fixated Street might be to put a sign above the door reading: 
"Not just a great restaurant and bar, but an income trust, too." 

Betanski previously covered all income trusts at Dundee Securities, earning a reputation as an expert in a booming sector that has been a godsend to Bay Street with a market capitalization approaching $100-billion. But when she left Dundee to join Desjardins last June, it was to concentrate on the oil patch's big companies and royalty trusts, too – a combination of coverage she calls "unique." 

When last we had lunch with Betanski almost 18 months ago, she was counselling caution on how investors should approach income trusts. Today, her analysis focusing on oil and gas, she's equally adamant that investors should know that royalty trusts are risky vehicles, not to be confused with fixed-income investments. 

We reckon there's nothing risky about a Keg filet mignon, cooked medium rare and accompanied by a caesar salad. Our guest orders the teriyaki salmon special, which comes with rice. A chunk of bread and butter fills in for a starter. Some Perrier and a Diet Pepsi are drinks enough. Though the wine list is impressive enough in quality and price, on Bay Sreet 
the luncheon drink has largely gone the way of the luncheon drunk of the good/bad old days. 

These are still good days for income trusts and income trust investors on the Street despite the budget proposals put forward to limit growth of conversions to trusts and to stanch corporate "tax leakage." But Betanski notes that while oil and gas royalty trusts and real estate income trusts (REITs) are exempt from the pension fund provisions proposed by Ottawa, they will be subject to a maximum 49% foreign ownership under the new restrictions. 

It's a measure that will likely lead to mergers between those trusts also listed on U.S. stock exchanges, which have enjoyed massive buying by American investors, and those listed solely in Canada with large domestic ownership. There are other tricky things to consider, too, Betanski says: 

First, "the success of the group depends on the strength of oil and gas prices and, as such, the sector is subject to extreme volatility." The 13%-14% yields, which have dropped from 17%-20% in the past 18 months, should never be considered a "fixed" income. 

Second, she says, over the past few years, it's really been difficult to go wrong in terms of what trust to pick. "Most did fairly well, but the challenge now is there's going to be a difference in performance based on which which trusts are managed well as oil and gas companies." Those with interesting opportunities within their assets will be better prepared if the equity market were ever to become more difficult. They will outperform those that have to buy more properties. 

Third, investors should look for more conservative payouts. Some are paying out 100% of cash flow instead of saving a bit for the long term. "We've seen a lot of trusts gradually reducing their payout ratios and I think that's a good thing." 

Betanski, a Torontonian, earned her sciences undergraduate degree at U of T and her MBA at Wilfrid Laurier University in Waterloo, Ont. She joined Scotia Capital six years ago, where she quickly "fell in love" will oil and gas research and analysis. Now, after her stint as income trust specialist at Dundee, she's back concentrating on her first love. 

"We're at a point right now where we might see a higher based price in terms of oil," she says, adding that analysts have been reluctant build the USS$35-plus-a-barrel into their projections. Strong crude prices in the past few years have helped to support the entire oil and gas trust sector. 

But there may be a price dip in this second quarter, when oil demand typically slackens. (Later in the week, OPEC said it would cut production, yet the oil price fell on a classic buy-the-rumour and sell-the-news market move.) A price in the low US$30s or high US$20s would not be particularly surprising. 

Such a price move would put further stress on the valuations accorded trusts, which are being traded at cash-flow multiples almost twice the premiums accorded a typical oil and gas company. Meantime, the typical company might be valued at 100% of its net asset value, whereas trusts valued at anywhere from 140% to 170%, which Betanksi says is "quite high." 

Which is where we can put our satisfaction level with lunch at The Keg. The filet mignon, the most expensive item on the menu at $22.95, was cooked just right. Our guest pronounced her salmon "excellent." And at $84.02, including tax, tip, soft drinks and a coffee, the bill and the first-rate service help make The Keg a strong competitor even in deep expense account territory. Barb Betanski, whose office is just around the corner, need not have been concerned that The Keg was not exotic enough for a Lunch Money venue. Anyway, lunch is mostly about person --not place – and conversation. 

William Hanley 

Material reprinted with the express permission of :The National Post Company, a CanWest Partnership.