Canadian income trusts: Precision Drilling is building for 2011 — and beyond

A rebounding global economy should continue to push up resource prices. That will help Canadian income trusts that serve the resource sector, including Precision Drilling Trust (symbol PD.UN on Toronto). Precision provides contract-drilling services to oil and gas producers, mainly in western Canada.

In light of recent developments surrounding Precision, we’ve updated our buy/sell/hold advice on the trust in the current issue of The Successful Investor. (Read on to find out how you can get a free copy of this issue. Along with our latest buy/sell/hold advice on Precision, it contains our full analysis of 16 other investments that could be suitable for your portfolio.)

New tax will put Canadian income trusts on an equal footing with regular corporations

Right now, many income trusts pay out a high percentage of their cash flows to their unitholders. This lets them avoid paying corporate taxes. It also gives many trusts significantly higher yields than a lot of dividend-paying common stocks.

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However, Ottawa’s new tax on Canadian income trusts will eliminate these income-tax benefits. The tax comes into effect less than a year from now, on January 1, 2011.

Along with many other income trusts, Precision plans to convert to a conventional corporation before the new tax kicks in. But regardless of whether they convert, trusts will have less cash to distribute to unitholders once they begin paying corporate taxes. That will prompt some to cut their distributions.

Focus on debt readies Precision for future gains

This new tax won’t affect Precision. That’s because the trust suspended its monthly distributions in February 2009 to focus on cutting its debt following its $2-billion purchase of U.S.-based contract driller Grey Wolf Inc. in late 2008.

The trust recently repaid $75 million U.S. of its debt. That helped bring its remaining debt down to a more manageable level, and could prompt Precision to resume its distribution payments.

Lower energy prices hurt demand for Precision’s drilling services in 2009. In response, the trust is decommissioning 38 of its older drilling rigs (26 in Canada and 12 in the U.S.), 30 service rigs and nine other units. It now has 352 rigs (203 in Canada, 146 in the U.S. and three in Mexico).

However, most of the 352 rigs that remain in service can handle hard-to-reach reserves, so they earn higher profits than Precision’s older models.

For our latest buy/sell/hold advice on Precision and dozens of other Canadian stocks and income trusts, be sure to consult the current issue of The Successful Investor. Click here to learn how you can get one month free when you subscribe today.