An energy or royalty trust is an investment vehicle that may engage in the development, acquisition and/or production of oil and gas reserves. The trust receives royalty income from producing properties (essentially, net cash flow) and then sells interests in the trust (called trust units) to investors. Conventional oil and gas royalty trusts are actively managed portfolios holding assets of mature producing properties. Substantially all of the cash flow generated by the oil and gas assets, net of certain deductions (such as administrative expenses and management fees) is passed on to the unitholders as royalty income. Capital expenses may also be deducted, but are usually subject to restrictions on the amount. The distributions are highly dependent upon the cash flow generated by the trust. In general, the largest variable in determining the level of cash flow is prices for crude oil and natural gas.
Royalty trusts provide an alternative (from owning the shares of individual companies) for investors to participate in the oil and gas sector.
Just as energy trusts focus on the oil and gas sector and REITs are comprised of portfolios of real estate, there are other popular income trust sectors as well. Generally these sectors tend to be populated with mature businesses with steady cash flows, such as utilities like power generation companies or pipeline companies.