Wild Bill's Legacy

Ebenezer William "Bill" Peyto was a very unique individual,
which is part of what made him such a superb mountain
guide. The royalty trust that bears his name is also quite
unique, which is part of what makes it such a compelling
investment.

"Wild Bill" Peyto, the legendary mountain guide, trekked
throughout the Canadian Rockies like they were his own
backyard. Like many an outdoorsman, he valued his personal
space. One particular Saturday night, Peyto walked into a
crowded Banff hotel with a live lynx strapped to his back.
A few moments later, he found himself alone in the
bar…just the way he liked it.

Peyto came to Canada from England in 1886. He initially
tried his hand at prospecting, got into the outfitting
business and later switched back to trapping and
prospecting. His mountain guide reputation grew as he lead
British, Swiss and American climbers on multiple
expeditions in the Canadian Rockies. One of his charges,
Norman Collie, describes the unique character that became a
legend:

"Peyto assumes a wild and picturesque though somewhat
tattered attire. A sombrero, with a rakish tilt to one
side, a blue shirt set off by a white kerchief (which may
have served civilization for napkin), and a buckskin coat
with a fringe border add to his cowboy appearance. A heavy
belt containing a row of cartridges, hunting knife and six-
shooter as well as the restless activity of his wicked blue
eyes, give him an air of bravado. He usually wears two
pairs of trousers, one over the other, the outer pair about
six months older. This was shown by their dilapidated and
faded state, hanging, after a week of rough work… in a
tattered fringe knee high. Every once in a while, Peyto
would give one or two nervous yanks at the fringe and tear
off the longer pieces, so that his outer trousers
disappeared day by day from below upward. Part of this was
affection, to impress the tenderfoot, or the ‘dude,’ as he
calls everyone who wears a collar. But in spite of this,
Peyto is one of the most conscientious and experienced men
with horses that I have ever known."

Recently, Peyto Chairman Ian Mottershead gave a
presentation at the CIBC World Markets Energy Trust
Conference. His remarks highlight a few of Peyto’s unique
characteristics:

"Peyto Energy Trust has a market capitalization of about
$2.5 billion, putting it among the larger trusts.

"Directors and senior officers own about 21% of the units.
The insider trading record shows a long string of buys, and
sales virtually only to pay taxes. The smallest Peyto
investment by a director is about $5 million.

"Peyto converted to a trust in mid-2003 and established a
new business model. It distributes about half its cash flow
and grows at a substantial rate with the other half.

"Peyto’s assets are concentrated in the Central Deep Basin
of Alberta, which is considered to be the province’s
premier gas exploration area. Geographically, this is
located about 300 kilometers west-northwest of Edmonton.
Company landholdings of 156,000 net acres (or 244 sections)
now stretch across 160 kilometers from Sundance in the
southeast to Cutbank in the northwest. Wild Hay, Leland and
Smoky/Kakwa lie in between.

"As at the end of 2004, Peyto’s reserve life was a long
12.2 years ‘proved’ and 17.2 years proved plus ‘probable.’
The company also owns the midstream facilities to gather
and process this gas.

"Peyto’s growth has come entirely via the drill bit, and
not by acquisition. Of the five most active companies in
the Deep Basin, Peyto is currently the most active in terms
of new producing wells over the past 12 months. The other
active companies in the area are Canadian Natural
Resources, Talisman Energy, Burlington Resources and Devon
Energy.

The "new" business model Peyto has established is in
contrast to more traditional energy trusts. Peyto
distributes approximately only 45–50% of its cash flow to
unit holders, using the other half to grow "at a fair
clip," in Mottershead’s words. Therefore, Peyto’s monthly
distribution produces an annual dividend of about 2.6%,
which is lower than what most other royalty trusts.

But the modest dividend payout facilitates Peyto’s
sustainable business model. Rather than spending down the
reserves or just trying to maintain the status quo, Peyto
is actively building for the future. This is not an easy
thing to do: Many income trusts promise "income plus
growth," but very few actually deliver. Peyto is one of
those few.

"In order to use reserve life as a measure of
sustainability," Mottershead explains, "you need to account
for the payout ratio. If the trust is paying out all of its
funds from operations to the unit holders, then the payout
ratio is 100%. When you adjust the reserve life for the
payout ratio, you can clearly see how much more sustainable
the Peyto model really is."

By keeping distributions in the neighborhood of 50% and
investing the other half of cash flow for solid, long-term
growth, Peyto has successfully extended its payout-adjusted
proven reserve life to more than 20 years, as compared to
just over 10 years for its closest competitors. This level
of sustainability ensures asset valuations will remain rock
solid, giving Peyto more long-run exposure to the positive
trend of rising energy prices.

If other trusts with unsustainably high payout ratios are a
"yield grab" in the short term, then Peyto is a solid value
play on energy for the long term.