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| Progress Energy Trust: Solid Structure |
| Cover Story | |
| By Alan Dorich | |
| Sunday, 01 April 2007 | |
 Progress Energy Trust says it has maintained a strong balance sheet and asset base and is preparing for tax changes that will be implemented in Canada in 2011. “One of the unique corporate structures we have here in Canada is the energy trusts business,” he says. “It is similar to the MLPs in the United States and allows us to pay out, without corporate tax, a portion of our cash flow stream.” The trust, he explains, pays out 60 to 70 percent of its cash flow to its investors. It reinvests the remaining 30 to 40 percent in its exploration and production program. “Rather than continuing with multiples of growth, we’ve chosen to take that growth portion of the cash flow [and] give it back to investors as a monthly return on their investment,” Culbert explains. “What we’ve set out to do is be sustainable year after year with efficient capital investments. “We look at ending the year with the same amount of reserves per unit as we started the year,” he continues. “Typically, [oil] and gas companies spend multiples of cash flow to provide that growth.” Making Progress The company was recapitalized in late 2001 as Progress Energy, a small exploration and production company. After three years of rapid growth, the company converted to the trust model by merging with another firm, Cequel Energy. “[We] brought the two companies together and turned Progress Energy into Progress Energy Trust,” Culbert says. As part of the conversion and restructuring, the trust started two new firms: ProEx Energy Ltd., a gas and crude oil producer based in Calgary; and Cyries Energy Inc., an oil and natural gas exploration and development company, also based in Calgary. Culbert notes that ProEx is led by President and CEO David Johnson, who is also the chairman of Progress. Cyries is led by Chairman and CEO Don Archibald, former president and CEO of Cequel Energy. In addition to its head office in Calgary, Progress has field offices in Grande Prairie, Alberta, and Fort St. John, British Columbia. Its major operating areas include the deep basin of northwest Alberta, central Alberta, the Fort St. John Plains and the northeast British Columbia foothills. This November, Progress announced it will maintain its rate of drilling activity from the fourth quarter of 2006 to the first quarter of 2007. According to the trust, it will invest approximately $60 million in the drilling of 25 to 30 net wells. “During the initial phase of our winter program, we have had very promising drilling results and our plan is to maintain our momentum while finalizing our full program,” Culbert said in a statement. “We have all of our plans in place, including equipment for drilling and completions services, facilities construction and all necessary regulatory approvals to complete our winter program.” Moving with Changes Culbert has had a long career in the industry. Before joining Progress, he was the vice president of marketing and business development at Encal Energy Ltd. He held the same position at Progress before taking his role as its President and CEO. In addition to his own progress through the ranks, he notes that the changes and challenges in the industry have kept him engaged. Most recently, he says, the Canadian government made a change to tax legislation, which will affect the trust’s business in four years. Although Progress will continue its tax-free status for the next four years, all trusts will become taxable in the year 2011. According to Culbert, many in the trust sector are consulting with the government to not only make sure they understand the new rules, but to provide input and modifications to them, as well. “[We want to] make sure the government has the facts before the final draft of the tax legislation is approved in parliament,” he states. According to the trust, its work in defining the proposed legislation will allow it to be better positioned for setting its own course when the rules become law. In addition, Progress notes that it is a member of the Coalition of Canadian Energy Trusts and the Canadian Association of Income Funds, which is encouraging the federal government to reconsider the new tax rules or at a minimum consult with stakeholders before the changes are implemented. ‘Well-Positioned’ The changes in tax regulation have required Progress to reassure its investors of its own survival. “[The investors] want to have assurances that their investment dollar is going to be safe under the new rule as it was under the old rules,” he explains. He asserts, however, that the trust has established a firm position. “We’re very well-positioned financially, technically and asset-wise to continue with the current program of being a leading [exploration and production]-based energy trust,” he states. Progress has managed to establish this position through several factors, Culbert says. These have included a high-quality asset base and its operations in highly desirable areas in the basin. “That provides you with opportunities,” he states. When choosing areas to explore within, Culbert says the trust has sought repeatability. “We want to work in areas where you can take the knowledge that you gained [previously] from drilling and move the play on trend,” he explains. In addition, the trust has chosen to operate in areas with multiple producing horizons. Culbert notes that Progress drills 2,300 meters down in the deep basin in northwestern Alberta and has produced seven different zones in that area. In the northeastern British Columbia foothills, the main target zone is the Triassic Halfway, which is found at approximately 1,800 to 1,900 meters. In addition, Progress is now starting to work on selective up-hole Cretaceous zones. Culbert says Progress also has strived to maintain a level exploration and exploitation program throughout the year. “We can work all year round, where [in] certain parts of Canada, you can only have winter access,” he states. Culbert says Progress has also assembled a strong staff that not only includes people with an exploration and exploitation background, but also those with the financial acumen to help the trust move forward. In addition, Progress has maintained a conservative balance sheet with low debt. When hiring its office workers and supervisors, Culbert says Progress has sought people who are entrepreneurial in nature. “We want to give them the autonomy and want them to be part of the decision-making process,” he explains. “We run very much like a small entrepreneurial company.” A key individual at Progress has been Johnson, Culbert says. “David is a prominent, experienced engineer in western Canada and is very well-recognized,” he states, adding that Johnson also “has been an excellent leader and mentor over the years.” Progress also has invested in ensuring its employees and suppliers are well trained in safety. Culbert notes that the trust has an active field program to develop more consistency in the safety expertise of its employees. Giving Aid “We have a fairly robust sponsorship program,” Culbert says. He explains that Progress not only sponsors local charities in the areas they operate within, but also has contributed to such organizations such as United Way and Tom Baker Cancer Clinic. The trust also has sponsored drilling certification training programs for aboriginals, as well as the Alberta Shock Trauma Air Rescue Society, which is an airborne rural emergency service that can provide aid to Progress’ staff in remote areas. The trust has sponsored the University of Northern British Columbia’s medical school. Culbert notes that this helps educate doctors and allows them to continue providing care within rural settings. |
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