As a youthful engineering graduate, Jeff Errico couldn’t wait to embark on a career in the oilpatch. Now, wild horses couldn’t drag him away from the industry that has consumed his entire working life.

The allure of the oilpatch bit Errico in 1973 when the freshly minted chemical engineer drove to Calgary immediately after his graduation ceremony at the University of British Columbia to start an illustrious career.

Today, even after 31 years as a professional engineer and senior executive, Errico’s passion for the ’patch and its people still burns brightly in his role as chief executive of Petrofund Energy Trust, one of Canada’s largest and oldest royalty trusts.

1. Did you grow up with an entrepreneurial edge?

Larry MacDougal, Business Edge
Petrofund Energy Trust CEO Jeff Errico has come a long way since his arrival in Calgary as a freshly minted chemical engineering graduate.

“No, actually not at all. My dad was a school principal, so I wasn’t exposed to business until I came to Calgary. I thought of becoming a teacher and, in fact, I now teach a course at the CAPL (Canadian Association of Petroleum Landmen). I enjoy teaching.

I enjoy mentoring and that’s probably one of the reasons for my success. I’ve always enjoyed developing people.”

2. Who were your mentors in your early years in the oil and gas business?

“I learned a lot from Ed Schwyl, who was my boss at Atlantic Richfield, and Doug Beckler, who was my boss at Dome Petroleum. Both were very, very good engineers, but what was really impressive was how they were able to create an environment where people wanted to excel. In some small way, I hope that I’ve been able to emulate them.”

3. What was your first job in the oilpatch after graduating from the University of British Columbia?

“My first job was as an operations engineer with Atlantic Richfield. It was actually quite a good place to start my career in terms of getting an overview of the industry. I spent some time drilling up in the Arctic, in various fields in Western Canada and in Texas.”

4. What has the transition been like, moving into the role as chief executive of Petrofund last year?

“It has been a fairly easy transition. Since I’ve been at Petrofund, we’ve acquired just over $1.5 billion in properties and we’ve done financing approaching $1 billion, so I’ve always been pretty involved on the business side and marketing side of things.”

5. What’s the key to successfully building an oil and gas trust through acquisitions?

“In very simple terms, the key is to look at your acquisitions and try to find value. What is equally important in making the right acquisitions is what you do with them once you acquire them. Being able to find the value and upside in acquired properties, and to make the right moves in development and maximizing the return you get from them, is key. To do that, you have to have a very, very strong technical team behind you. I’d like to think that my operations experience (as an engineer) has given me an ability to put together a technical team that can fully exploit those assets.”

6. What’s your primary focus in developing Petrofund’s business model?

“Our primary focus is to maintain distributions (to unitholders) over the long term. We’re managing a depleting asset, so the key is to try to restore the production and value as we go forward. Sustainability is probably the one word that I would like to think that we concentrate most on. We certainly are very concerned about what’s happening right now, but we spend a lot of time looking at what the trust is going to look like in two years.”

7. So what will it look like in two years?

“Well, we hope it will look very similar to the way it looks right now. Will we be bigger? I guess that depends on the opportunities that we see in front of us. We have grown significantly over the past few years, but our focus is not on growth. Growth would come as a result of seeing opportunities that make us bigger. We would be just as happy if we can maintain value at the same size.”

8. What’s the current acquisition market for properties?

“The current acquisition market is very crowded. As you know, there are a lot of companies that have converted to trusts and that’s created much more competition for the assets. But at the same time there are always assets available. I would say it’s very competitive and prices are high. Having said that, as it has turned out, we’ve stayed in the market through high times and low times. Just recently, acquisitions that we really stretched for (in terms of price) a year ago now look very cheap by today’s market. So the key is to work through the cycles (of the sector’s highs and lows) in a disciplined manner.”

9. Do you shake your head when you see so many companies in recent years converting to royalty trusts, some of which may not be suitable for the trust model?

“We certainly have been taken by surprise by the number of companies that have converted. And we see different models for sustaining their trusts. I think we’re going to find ultimately that there is more than one model that works for a trust.”

10. So what really sets Petrofund apart from other trusts?

“I’m always hesitant to answer that question, but the things we focus on are longevity and sustainability. We’re conservative and we certainly emphasize discipline. This trust has been around for 14 years and, having been through the cycles, we try to use that experience to give us the discipline to prepare for good and bad times. We are not very good at predicting the cycles, but we try to be good at being able to weather it.”

11. So what’s your take on high oil prices and how do you prepare for the possibility of a price correction?

“We want to be conservative with our debt and make sure the assets that we’re buying have some long life, so that if there is a downturn we’ll be able to work through it.”

12. Are you frustrated that Petrofund’s unit price has lagged behind most other trusts?

“Last year at this time, I knew that we had a very solid trust, yet I was still surprised that we had done so well. Our trust didn’t look a lot different last year when we did so well in the market than it does this year. We try to be stable, disciplined and predictable. Notwithstanding that, there are certain times when the market seems to run us up and other times when it runs us down. Ten years ago, when we started growing, our price would have been equivalent to about $15. Now in that time, we’ve probably given our unitholders about $20 in distributions and our price today is somewhere around $16. This is a long-term investment and we’re more focused on that. It’s going to go up and down, but over the long term we’re very happy with the type of performance that we’ve delivered.”

13. Petrofund is proposing a reclassification of its units that would require approval from unitholders. Can you explain the reasons for that?

“This is a major issue. We are an interlisted trust (listed on the TSX and American Stock Exchange). This (Petrofund) has been a very popular investment vehicle in the U.S. and we’ve acquired a 67-per-cent U.S. ownership. This year in the federal budget, the government gave an indication that they were concerned about the high non-resident interest in Canadian trusts and indicated they would be taking steps to reduce that. They have since put out some draft legislation that indicates that they want to see the non-resident interest in trusts to be below 50 per cent. We are addressing this assuming that the legislation will be enacted. So we’re looking at a situation where the Canadian units that are now held in Canada will not be eligible to be held by non-residents. So we will have two classes of units that will get us onside with the government legislation. If we were unable to get onside and the government (enacted) that legislation, then it would be quite severely punitive to the trust.”

14. What’s your long-term vision for Petrofund?

“We are acquisition-focused and we have always had a rather large undeveloped land position. As acquisition prices go up, you will see us spend more money on development projects. Four or five years ago, our (unitholder) payout ratio was probably in the 90s (per cent) and in the last couple of years we’re down somewhere between 70 to 80 per cent (in payout ratio to unitholders). I think you will continue to see that trend where we are reinvesting more of our available cash flow and giving out a lower payout ratio to our investors.”

15. What’s your outlook for the energy industry over the next five to 10 years?

“I see oil prices remaining stronger than they have been historically and I see the industry continuing to become more efficient in harvesting available oil and gas reserves in Alberta. So I’m generally positive, looking forward.”

16. Will it be necessary to expand your horizons to sustain production levels?

“Yes, we will have to expand our horizons. We’re certainly looking at a number of different areas. Conventional Western Canada has been very, very good to us and we’re not considering abandoning it. But, yes, we are looking at other possibilities for both conventional oil and gas in other jurisdictions as well as non- conventional opportunities as well. We have not made a decision on when or how much we will go into other areas, but it’s clearly something we’re looking at.”

17. Are you considering a move into oilsands?

“That’s one of the things we would look at. It’s hard to say what will happen. One of the problems with oilsands projects is that they’re much longer life and typically they give a much lower yield than conventional oil and gas projects. So it’s going to be a difficult transition to have the market understand that they need to expect a lower yield (over) a longer life. That process is more likely to be gradual than a quantum change.”

18. Based on your experience in the industry, what’s your best advice to a budding oil executive?

“If I were going to give some advice, I would like to see someone acquire a broad knowledge in the industry. And they also need to enjoy what they’re doing. The other thing is that they should never forget how important the people around them are to the success of their career and the success of their company. You want to have a good relationship with people, particularly people with a diverse background. It’s just wonderful to be able to call on somebody and ask for help if you don’t understand it. Relationships are really key.”

19. How long do you hope to remain as CEO of Petrofund?

“I would say that, longer term, I would probably not retire but instead slow down and eventually go back to my roots and get involved with a smaller company again. A job with a smaller company would be a lot of fun for me, although maybe not as much fun as this. I have a very close family and that’s also a goal of mine, enjoying my family and spending time with them. Family has always been very important to me and having a good environment for families is also very important at our company. I think I’ve done a reasonable job of that.”

20. Can you picture yourself working outside the oilpatch?

“I’m an oilman. I couldn’t picture myself doing anything else.”

THE COMPANY: PETROFUND ENERGY TRUST

* Brass: Jeff Errico, president/CEO; Jeff Newcommon, executive vice- president; Vince Moyer, senior VP/chief financial officer.

* Profile: Petrofund, founded in 1988, is one of Canada’s oldest royalty trusts. The organization acquires and manages a portfolio of oil and gas properties in Western Canada.

The business model focuses on purchasing oil and gas properties and managing the production and production marketing of the properties. Petrofund pays distributions to unitholders on earnings from interests in more than 200 oil and gas properties.

* Monthly Distribution: 16 cents per unit.

* Unit Price (TSX:PTF.UN): $15.27 (52-week range, $14.56-$19.24). The company also trades on the American Stock Exchange under the symbol PTF.

* Head Office: 600, 444 7 Ave. S.W., Calgary, T2P OX8.

* Website/E-mail: www.petrofund.ca/info@petrofund.ca' target='_new'>www.petrofund.ca/info@petrofund.ca

* Phone/Fax: 403-218-8625/ 269-5858.

IN PROFILE: Jeff Errico

* Title: President/CEO, Petrofund Energy Trust.

* Born/raised/age: Vancouver/54.

* Education: University of British Columbia, applied science degree, chemical engineering.

* Family: Wife Ann, two children.

* Career: Errico has spent 31 years in the oil and gas industry in engineering, operations and senior management. He began his career in 1973 as an engineer with Atlantic Richfield Canada and also worked as an engineer with Dome Petroleum, Canso Oil & Gas and Quasar Canada. He joined the senior management team of Petrofund in 1995, was named president in 2002 and CEO in 2003.

* Key Stat: In his nine years with Petrofund, Errico has headed an acquisition program in which more than $1 billion in oil and gas assets have been purchased.

* Moonlighting: Errico teaches a class for the Canadian Association of Petroleum Landmen.

* Passions: Reading, hobby building, sports.

(Gyle Konotopetz can be reached at gyle@businessedge.ca)