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Energy or Royalty Trust Definition
An energy trust is a kind of business entity that invests in operational assets (such as oil, gas and other minerals). The majority of the profits generated from these resources are then distributed to investors. Energy trusts don’t invest in stocks or in any other financial assets. The trust is generally organized as a master limited partnership.
A Little More on What is a Energy Trust
Energy trusts are generally not subject to taxation at the corporate level. This exemption is allowed only if the trust pays out more than 90% of their profits. This is one of the reasons that energy trusts distribute a major portion of earnings to investors. In a very similar way, energy trust resemble real investment trusts (REITs).
However, energy trust that operates across the globe varies from country to country. For instance, energy trusts in the US are different from energy trusts that operate in Canada. For example, energy trusts of US may hold only gas and oil mineral rights; whereas, energy trusts that exist in Canada are allowed to include more minerals to the trust. And thus, the trust is able to functions for a long time. In contrast to Canadian’s energy trusts, energy trusts operating in US only hold fixed amounts of natural reserves and cannot acquire new minerals which can be depleted over time. Ultimately, US-based energy trusts may become worthless as the resources are depleted and sold.
References for Energy and Royalty Trust
Academic Research on Energy or Royalty Trust
On the pricing of mandatory DCF disclosures: Evidence from oil and gas royalty trusts, Patatoukas, P. N., Sloan, R. G., & Zha, J. (2015). The Accounting Review, 90(6), 2449-2482. This paper identifies a setting in which firms are required to disclose discounted cash flow (DCF) estimates relating to the value of their primary assets. Evidence indicates that mandatory DCF disclosures can be incrementally useful for security valuation, while it also indicates that investors may overlook such information, potentially due to lack of attention and accounting expertise.
Oil and gas risk factor sensitivities for US Energy Companies, Tjaaland, S. H., Westgaard, S., Osmundsen, P., & Frydenberg, S. (2015). The Journal of Energy and Development, 41(1/2), 135-173. The purpose of this study is to identify and access the risk factors that drive U.S oil and gas returns. The authors also examine whether the same risk factors hold in four sub-sectors: exploration and production, integrated oil and gas, oil equipment and services, and pipelines. Royalty trust is also included in the sample.
Royalty Trusts, Brussa, J. A. (1996). Royalty Trusts. Alta. L. Rev., 35, 314. This article outlines several key economic and income tax aspects of the royalty trust financing form. The author describes various ways to structure a royalty trust to ensure that it will function as a successful financing vehiclewith the ability to take maximum advantage of certain tax consequences which are enumerated by the author.
Royalty trusts, Dollinger, S. G., & Helsley, J. K. (1981). Royalty trusts. Oil Gas Tax Q.;(United States), 30(2). This paper examines the general definition, concept, importance and the shortcomings of royalty trusts. It also analyses it usefulness to firms and its implementation.
Public limited partnerships and royalty trusts: the sum is greater than the parts, Wrappe, S. C., & Sefton, D. L. (1984). Oil Gas Tax Q.;(United States), 33(1). This paper labels royalty trusts as one way to realize capital appreciation of equity interest while minimizing the effects of double taxation. It also examines an alternative method; the public limited partnerships, and analyses the effect of combining both methods on the part of investors in the oil and gas industry.
Overview of royalty trusts, Panarites, P. (1996). In this paper, the nature of royalty trusts as a means of financing exploration, development, production, and refining of oil sand and heavy oil to produce competitively marketable petroleum products, is reviewed. The attributes of the two classes of royalty trusts are summarize. This paper aims to show that fundamental class royalty trusts also offer long term pure exposure to the underlying business, in addition to yield.
Tax Consequences for Foreign Holders of Oil and Gas Royalty Trust Units, Heyen, L. J., & Louie, V. V. (2012). Int’l Tax J., 38, 13. The purpose of this article is to highlight certain tax consequences to foreign investors of owning units of a publicly-traded natural resource royalty trust treated as a grantor trust for U.S federal income tax purposes.
Rexamining the Hotelling Valuation Principle: Empirical Evidence from Canadian Oil and Gas Royalty Trust, Shumlich, M., & Wilson, C. (2009, June). In ASAC (Vol. 30, No. 1). This study contributes to this literature of Professor Hotelling’s (1931) theory on resource extraction in two ways. Results from this contribution show that per unit reserve value is equal to the net price less a call option on the oil price.
Qualifying Environmental Trusts as Financial Security for Oil Sands Reclamation Liabilities, Sandilya, A., Maier, M., Dixon, R., & Schneider, T. (2012). This article addresses the use of environmental trusts as financial securities, subject to SEC regulation.