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Strategies & Market Trends : Ride the Tiger with CD -- Ignore unavailable to you. Want to Upgrade?

To: maxncompany who wrote (111576)	4/15/2008 4:04:06 PM
From: Canuck Dave	Read Replies (1) \| Respond to of 313046

Still in place for 2011, but Nat gas prices have improved. So... trusts a good buy for 2 more years or so, I think. CD

To: maxncompany who wrote (111576)	4/15/2008 9:52:43 PM
From: onepath	Respond to of 313046

This article out today from the Globe and Mail on trusts and tax status... Canadian energy plays RICHARD LEHMANN Tuesday, April 15, 2008 Canadian oil and gas trusts are a favourite of mine, thanks to their capital gains potential (something most income vehicles can't aspire to) and healthy dividends. I last recommended them to you in 2006, when energy prices were softening. A lot has changed since then. Oil prices are at record levels, and natural gas is way up, too. Is this the time to sell these Canadian royalty trusts? Quite the contrary. They're still good, despite the risk of higher taxes and the difficulties of replacing reserves. Trust shares are oversold and are a buy now. Slideshow: Four fat yields from Canada Some exaggerated fears surround the trusts. One is the fear that conventional oil production in Western Canada has peaked. So growth potential looks stunted, a condition made worse by rising energy production costs. The industry consolidation that has ensued, as smaller trusts have been bought up, is no succour to investors, because the takeover premiums aren't very big. Reason: The Canadian government has put size limits on trust mergers. Another downside is that Ottawa plans to yank the trusts' tax-free status in 2011, a nasty provision known to trust investors as the Halloween Surprise, since it was announced Oct. 31, 2006. The news that trusts will be paying corporate taxes sent their prices skidding 20 per cent overnight, and they haven't climbed back since. Even oil at $100 (U.S.) per barrel hasn't helped. Oil-rich Alberta is making matters worse by raising the royalty it gets from the oil that's extracted. Investors get favourable tax treatment but not a tax holiday. Suppose a U.S. investor held a trust that distributed $1.68 for each unit last year. The whole payout gets hit by a 15 per cent Canadian withholding tax, 25 cents per unit, before it arrives in the U.S. account. Surprisingly, even though the trust never paid corporate tax back home, the $1.68 is considered a qualified dividend and taxed at the 15 per cent capital gains rate because most income trusts count as qualified foreign corporations under IRS rules, says Jerry Beneke, who advises energy trusts at KPMG in Calgary. The tax paid to Canada can then be credited against U.S. income tax. If the trusts are taxed by Canada at the corporate level and earnings do not continue to grow, dividends will shrink. Even more reason for caution: Both the qualified dividend and the trusts' corporate tax exemption expire on Dec. 31, 2010. Investors seem to be as much put off by the confusion as by the tax burden. There's a decent chance that the tax change slated to begin in three years will be scotched. Even if the tax does hit then, most trusts have built up pools of deductible items that will postpone corporate tax payments for at least four more years, longer still for trusts that are boosting their reserves. Production from oil sands is just beginning in Canada, where reserves are huge. Oil sands production requires natural gas to heat and liquefy the gunk. Natural gas is not that expensive for trusts, which have plenty of it. Oil sands effectively represent a conversion of natural gas into oil. Income investors should value these trusts much as they would convertible securities, but in this case convertibles paying double-digit current yields. Over five years you will have recovered two-thirds of your investment through dividends (barring any dividend cuts, which I think are unlikely), and you will still be holding a resource-rich trust with many good years ahead. The king of oil and gas trusts in size and potential is Penn West Energy Trust. It produces 200,000 barrels of oil equivalent a day and has 11 years of proven and probable reserves. Penn West also holds significant oil sands properties, which at this point aren't counted in its reserves. The trust's $4.08 dividend consumes 76 per cent of cash flow from operations, which means there's a bit of money left over to rebuild reserves, and furnishes a yield of 14.7 per cent. Another big trust is Enerplus Resources. It produces 100,000 equivalent barrels a day. The dividend yields 11.7 per cent, which represents 74 per cent of cash flow. Enerplus has proven reserves of 15 years. Both these trusts have grown through recent acquisitions and will be leaders in oil sands development. Their cash flows don't yet fully reflect current oil prices because they sell a good deal of their production forward, meaning they contract now for delivery later. Locking in advanced orders has the virtue of granting them stability, even though the income takes a while to catch up when prices are rising on the spot market. When's the best time to buy? Over a number of months. Energy price flux does affect shares. Smooth out the cost. Richard Lehmann is editor of the Forbes/Lehmann Income Securities Investor. Visit his homepage at www.forbes.com/lehmann Slideshow: Four fat yields from Canada © The Globe and Mail