A new assessment of the Canadian oil and gas income trust market finds that the trusts are likely to experience heightened variability in their distributions.

The group is part of energy-related income funds, the largest sector of the Canadian income trust market.

The overview by Standard & Poor’s overview concludes that oil and gas income funds’ revenues are inherently volatile; their assets are depleting with finite lives; and, their distributions will be pressured as oil and gas prices vary and reserves are depleted.

“Standard & Poor’s expects that the oil and gas-producing trusts will continue to exhibit variable operational stability related to the various uncertainties in the direction of oil and gas prices,” it says.

It says that “trusts with high asset quality, a record of low cost reserve replacement, good diversification of properties, and management experienced in operating through commodity price cycles are likely to have a higher predictability of cash flows.”

S&P notes that the although strong oil and gas prices in 2002 and 2003 allowed most funds to meet their capital, financing, and distribution payments, a downturn in pricing would “severely” strain a fund’s ability to meet its spending requirements.

S&P also says that the governance in the oil and gas sector generally meets expectations. “Most of the funds have internalized their original external management processes with the objective of reducing both operating and acquisition costs and aligning management interests more closely to those of the unitholders.

It adds that all of the trusts in the oil sector have an independent trustee governing the trust. “In contrast to other income fund sectors, like real estate, that have a board of trustees governing the trust, the oil sector funds have a corporate trustee.”

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