Daimler is actually paying about USD1.5 billion to get out from under Chrysler’s healthcare obligations to workers and retirees. What seemed manageable nine years ago when the automakers combined to form DaimlerChrysler is now driving the companies apart.

(Cerberus is investing USD7.4 billion in cash, of which USD1.35 billion will go to Daimler. Also, Daimler will invest USD2.5 billion in cash in Chrysler and lend it another USD400 million. Daimler ends up about USD1.5 billion out of pocket but also gets a 19.9 percent stake in the new Chrysler.)

Last week, PrimeWest Energy Trust announced that it had agreed to acquire Shiningbank Energy Income Fund in a share exchange. The deal calls for Shiningbank unitholders to receive 0.62 PrimeWest unit for each Shiningbank unit and is expected to close by mid-July. Based on the CD23.55 May 9 closing price for PrimeWest, the deal values Shiningbank units at CD14.60, 4.2 percent above the average price during the past 30 days on the Toronto Stock Exchange.

Whether this one is later characterized as from the depths or as a heavenly gift depends almost entirely on the direction of natural gas prices. 

The two trusts will operate as a single trust under the PrimeWest name. Both sets of managers and directors will still be involved. The deal is subject to the approval of unitholders of at least two-thirds of Shiningbank units and two-thirds of PrimeWest units.

The CD1.25 billion deal is the largest in the energy trust sector since the Oct. 31, 2006, announcement that income trusts would be subject to a tax on distributions beginning in 2011.

PrimeWest and Shiningbank say combining will cut the cost of raising capital, boost liquidity for unitholders and lower oil and gas development costs. The new PrimeWest will have proven and probable reserves of about 280 million barrels of oil equivalent and would have produced about 66,000 barrels of oil equivalent a day during the first quarter. Based on those numbers, it would be the fifth-largest income trust.  

The deal is as much about natural gas prices as it is about the new tax. Output for the combined trust will be weighted approximately 70 percent to natural gas and 30 percent to crude oil.

The merged company would extend PrimeWest’s current reserve life to 11.5 years from 9.8 years. About 4,000 barrels of oil equivalent per day produced from noncore properties will probably be sold after the deal closes. PrimeWest intends to boost its distribution 3.3 percent.

Shiningbank is weighted 76 percent to natural gas production. The company struggled mightily in the wake of Finance Minister Jim Flaherty’s tax bombshell as the weight of that future burden, combined with falling natural gas prices, forced a January distribution cut.

Shiningbank also reduced its target payout ratio to 60 percent to 65 percent of estimated 2007 cash flow from a three-year average of 84 percent. It drilled just 11 wells during the first quarter of 2007, down from 77 a year ago.

But things could be turning.

According to the International Energy Agency (IEA), “the world ‘dodged a bullet’ in 2006 but gas remains vulnerable and expensive.” An exceptionally warm winter in 2006 led to a major correction in gas prices and a subsequent pullback in spending in Canada. But the price reversal is proving temporary.

How “temporary” is obviously of critical import. But gas producers are cheap right now, and the long-term view makes the current weakness look like a good entry point.

Gas prices spiked on tight fundamentals in 2005 but backed off on excess supply accumulated during the warm winter of 2006. After peaking at USD15 per million British Thermal Units (MMBtu), prices bottomed at close to USD4 per MMBtu last September.

Softer prices and a rising Canadian dollar forced Canada’s producers to cut back on capital spending going into 2007. Approximately USD7 billion was cut from USD33 billion in spending in Western Canada, according to the IEA.

But the natural gas market has already started to recover. Storage levels have declined in the first quarter of 2007, and US demand for natural gas is estimated to jump by 2.9 percent in 2007. Prices have roughly doubled to just south of USD8 per MMBtu recently.

As demand for natural gas increases in the next decade, North American supply isn’t expected to keep pace with existing demand. Consumption will become increasingly dependent on imported liquefied natural gas (LNG).

Although the LNG market is booming and will continue to be a major area of spending in coming decades, there are serious concerns associated with supply because of cost overruns and delays with major gas-producing projects overseas.

The US natural gas market will become increasingly reliant on these overseas gas projects. Delays and cost overruns will increase the risks of supply shortfalls in the medium to long term.

Gas prices look set to go higher, which is good news for the new PrimeWest.

The Roundup

We’re on the road this week at the Las Vegas Money Show and haven’t had a chance to digest the latest round of first quarter earnings news.

We’ll be back next week with a full roundup.

And if you’re in Vegas for The Money Show, drop by booth No. 724.