CIBC Research calls for 8% O&G income trust drop: best case

For all the institutional investors that use low discount rates to value prospective investments, this CIBC note shows you how static the traditional models can be when it comes to pricing risk into a deal. In one day, with a simple press conference, you could say that the discount rates for a variety of investment sectors just went up dramatically. And, as CIBC Research reports this am, the consequences will be painful financially:

“Oil & Gas Royalty Trusts

The Impact Of Taxation On Oil & Gas Trust Valuations In light of the announcement by the Department Of Finance that trusts will effectively be taxed as corporations, we view the valuations of the taxable E&P group as the floor value (or worst case scenario), which would imply 32% downside from current levels for the trusts. We estimate a best case scenario at 8% downside. Overall, we believe that the impact to unit prices will be 10%-15%. With a sell-off of less than 5% we would reduce our exposure to the group, while a buying opportunity would present itself under a correction of more than 20%.”

MRM