Canadian Energy Trusts: The Best Long Term Income and Dollar Hedge?

The High Dividend Stock Investor's Collapsing Dollar Survival Guide, Part 7A

1. MARKET STATUS

Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices. See Part 6A, Market Update: Warning: Do Not Feed (Yourself to) the Bears for full details. In short, we remain in a confirmed downtrend.

Treasury Secretary Geithner’s plan has revived the rally, but we’ve seen lots of short lived news driven rallies recently. Still, the idea of incentives to private investors to takeover questionable debts is a step in the right direction, since the government should not be in the financial services business any more than absolutely needed.

A. Ramifications for High Dividend Stock Investors

The overall trend continuing down, so use the current rally to unload unwanted stocks or pick up some partial short term hedges in the Ultrashorts at the following strong support levels, with sell stops about 10-15% below strong support in case the rally is prolonged, you’ll get out with small losses. Continue to invest only with funds allocated for longer term investment that you don’t need for the next six to eighteen months at least. What you buy now may well go lower.

• UltraShort S & P 500 Proshares (SDS) – Buy under $75, Strong Buy under $65: GETTING VERY CLOSE
• **UltraShort Financials ProShares (SKF) -- Buy Under $121; Strong Buy below $105: CURRENTLY AT STRONG SUPPORT! BEGIN TAKING POSITIONS
• UltraShort QQQ ProShares (QID) – Buy Under $55, Strong Buy under $50
• UltraShort Real Estate ProShares (SRS) – Buy Under $58, Strong Buy under $48
• UltraShort Russell2000 ProShares (TWM) – Buy Under $75, Strong Buy under $65: CURRENTLY AROUND $73 BEGIN TAKING POSITIONS.

If you look at a chart for these, you’ll note my buys are very conservatively low. Before the current rally some readers suggested we would never see them. Guess what – many are already at or approaching these strong support levels. The SKF is already below and worth at least a small position, since there is renewed optimism regarding the financials, yet they’re far from resolved. USE SELL STOPS as noted above, since these can quickly cut against you.

1. Continue to Take Partial Positions at Our Recommended Strong Support Levels

Beyond the Ultrashort ETFs if you can earn reliable dividends from 8-12 percent or more while you wait for recovery, ongoing investment makes sense. As noted above, with a confirmed downtrend and likelihood for further declines, refer to our below recommended buy levels, which are at strong support levels.

2. Use Sell Stops?

While our emphasis is buy and hold as long as the distribution is safe and fundamentals hold steady, some may want to hedge their bets, especially if they may need the cash within the next year or so. It helps preserve capital, but only if you then buy back before the price exceeds your sell price. Most don’t time the market well.

Again, our focus is on getting high yields from healthy businesses whose price will recover while we earn outsized returns, and we don’t try to time the market too much.

2. UPDATE: THE CASE FOR AND AGAINST THE US DOLLAR

See Part 1 and Part 2 of this series for the full story.

Recently China has openly called for replacing the dollar with a special newly created basket of currencies. Given the practical difficulties involved, this is unlikely to happen in the near future, and the Chinese know it. However, it must be noted by those with major USD holdings as a sign of things to come. There are lots of big players and governments holding mountains of dollar assets, and they can’t be happy about exploding supply of greenbacks.

It’s an ominous sign for the U.S. dollar. Unless the Obama administration does an extraordinary job in restoring stability and confidence in its currency, one of the long term ramifications of this U.S. – ignited world crisis will likely be a long term decline in demand for the USD as the large investors prudently seek to diversify out of the USD and limit their currency risk.

3. WHAT MAKES A HIGH YIELD STOCK USD INFLATION RESISTANT?

See Part 3 for the full details, but here’s the summary.

We’re seeking stocks of strong companies that mostly earn and distribute a high dividend in a non-USD currency and have a dominant position in a market for an essential product or service.

In this installment, we’ll begin exploring opportunities in the best single country in the world for stocks that combine high reliable dividends and USD hedge, Canada.

4. WHY THE CANADIAN DOLLAR IS ONE OF THE BEST U.S. DOLLAR HEDGES

For those seeking to diversify out of the USD, the CAD is one of the best alternatives.

A. Grand Banks

Perhaps the most compelling reason to have a stake in the Loonie is the banking system behind it. Unlike most of the world, the Canadian banking system is a source of relative strength. Due to more effective regulation and conservative management, Canadian bank avoided subprime lending. They were not allowed to shift capital into more speculative businesses and endanger their overall health.

Thus the Canadian financial institutions will not be costing taxpayers trillions in bailouts. Loan default rates remain low, the banks’ finances and deposits are sound, and credit is available. Fourth quarter results far exceeded expectations on Wall Street and Bay Street. Most dividends were well covered or affirmed based on expected improving conditions later this year. Profits did suffer due to asset write downs, but the need for government assistance has been limited. The better Canadian real estate firms are actually performing relatively well.

Thus supply of CAD will not be expanding by orders of magnitude, unlike the USD, for massive bailout programs, and the CAD should retain its purchasing power far better.

Last year, a group of international banking experts was formed called The Group of Thirty. In January, this panel of former central bankers, finance ministers, and academics chaired by former US Federal Reserve Chairman Paul Volcker, issued a report with recommendations for repairing the world financial system and preventing a similar crisis in the future.

The report, Financial Reform: a Framework for Financial Stability, essentially recommended imitating much of the Canadian banking system. Its recommendations included:

• Imposing capital limits on bank run trading operations.
• Barring large commercial banks from running hedge funds and private-equity firms that mix bank and client funds.
• Tightening government oversight of other kinds of financial institutions like insurance companies, investment banks, and broker-dealers.

In short, the report argued that because the financial services industry is so fundamentally essential to economic stability, it become more like the regulated utility industry – dominated by fewer, well capitalized players with more government supervision to preserve their health and continuity, albeit at the expense of avoiding more potentially profitable but speculative and risky businesses.

B. The Loonie Is a Commodity Based Currency

Because commodity exports are such a large part of the Canadian economy, the CAD tends to follow prices of energy, and other key commodities like grain and iron ore, etc. Thus they have all fallen together in the current slowdown.

However, as world populations continue to expand, even less than robust recovery will ultimately drive essential commodities higher, and so too support a rising Loonie.

Of course, there are other factors influencing how the CAD and USD fare against each other and other currencies, and the Australian Dollar shares much of the CAD’s USD hedge characteristics. Nonetheless, the CAD is a compelling hedge against the USD.

5. Canadian Oil and Gas Producer Income Trusts - The Big Picture

A. The Short Version

The best of these already have the price and dividend cuts behind them, still pay high yields at current prices, and probably will continue to do so even if there are further dividend cuts. They will likely double or triple both yields and prices as energy inevitably recovers. Thus for those who can wait 12-18 months, these stocks have the highest likely price appreciation potential of any high dividend stock.

However, the near term bears further downside risk.

B. The Longer Version

Except for those with some limited price hedging, however, revenues for energy producers everywhere have indeed deteriorated dramatically along with energy prices (oil from $150 to $40- $50 a barrel and lower, gas from $13 to $4 per MMBtu). Virtually all of the following recommendations have suffered stock price and dividend cuts of similar magnitudes, in order to preserve cash for survival and/or continued developing new supply sources and maintain/grow their reserves for future growth. All could cut further if energy temporarily dips much lower if there is a short-term supply glut.

Current prices for oil and gas are about USD 50 and USD 4. For perspective, these prices are well below global replacement costs for oil and gas (USD 80 and USD 8) and well below production costs for non conventional sources like tar sands, shale, and offshore drilling.

Thus we’re seeing unprecedented and continuing global supply destruction as much current and planned production is being reduced or halted.

The obvious good news is that this supply destruction makes future energy price recovery and new highs virtually inevitable as economies recover. When that happens, these energy trusts will recover their prior prices and dividends.

In Part B, we’ll look in detail at the following best selections for this group, and how the new tax regime coming in 2011 will likely affect them.

Note: All amounts quoted are in U.S. Dollars unless otherwise noted. All stock symbols are New York Stock Exchange unless otherwise noted. Yields are as of the day prior to publication.

C. Energy Income Trusts – Specific Recommendations

See Part B for full details on each and a look at how the new Canadian tax laws for 2011 will likely affect them.

The short version is that these are great long term income plays with some of the best appreciation potential of any income stock. However, short term risks include further new price lows (especially with the current rally) and dividend cuts if energy prices drop again.

Take only partial positions until energy prices appear to have stabilized, but be ready to load up on these as the market begins to show interest. Both prices and distributions will soar as energy recovers, giving you high yields and capital gains.

• Advantage Energy Income Fund (AAV). UPDATE: Has suspended dividends until further notice. It chose to use cash to continue development and not jeopardize present survival or future growth. The smart move, but income investors were not pleased. Its current price is at about a fifth of its reserves value. Hold if you can, or sell for loss but watch, it will be back.
• ARC Energy Trust (AETUF.PK): Buy under 13, Strong Buy under 10. Yield 19% prices in dividend cut, which with current payout ratio around 40% seems unlikely unless energy falls further. Reserves expanding, debt and costs falling.
• Claymore/SWM Canadian Energy Income Fund (ENY): Buy under 10, Strong Buy under 8. Yield over 10%. For those that want to buy a basket that attempts to mimic this sector. Unfortunately, many good assets are not widely traded enough for this fund, which is why I prefer to cherry pick individual stocks.
• Enerplus Resources Fund (ERF): Buy under 20, Strong Buy under 16. Yield over 9%. One of the best choices of the group.
• Provident Energy Trust (PVX): Buy under 4, Strong Buy under 3. Yield over 14% after the recent 33% dividend cut. Financially stable.
• Vermillion Energy Trust (VETMF.PK): Buy under 19.25, Strong Buy under 18.25. Yield 9.7%. One of the best of the group.
• Peyto Energy Trust (PEYUF.PK): Buy under 7, Strong Buy under 6. Yield 17% after the recent 20%, dividend cut appear safe, barring further energy price drops. Expanded reserves to17 years, an industry best. Finances solid.

Disclosure: I have positions in most of the above mentioned investments.

Comments

[rickf:]

I'd add Penngrowth (PGH) as a reliable CanRoy - from what I have seen in my own research, the firm cut its dividend (still pretty nice though) and is the best-hedged in terms of guarding against oil volatility....I think they're like 55% hedged or something, far more than their peers up north.

Disclosure: Long PGH via shares and short puts

Mar 26 07:53 AM

[longoil:]

I would also add the two following Canroys in addition to ERF.

COSWF.PK is a well management company with oil sands reserves greater than 40 yrs. Yield is currently 12% and it is trading at 50% of its 2008 high.

PWE is another excellent Canroy. Yield is 28% and its reserve life is 10 yrs. It is trading at 33% of its 2008 high and I would expect the yield to be cut to half at some point.

Mar 26 08:31 AM

[notagoldbug:]

you are clueless about cdn trusts as they are depleting assets based on issuing stock to make acq.......their yields are false and a blowdown IRR calculation needs to be done.....that being said the canadian government has givent then until 2011 to convert back to corporations and they will slash their payouts if they havent already
stay informed

Mar 26 08:40 AM

[notagoldbug:]

you guys are clueless...canadian oil/gas trusts are to convert to corp by 2011 so just buy oil/gas stocks......NOW.......... trusts are leveraged and cuting their distributions .. yields are a false way to evaluate the investment merits....stay informed

Mar 26 08:42 AM

[biomedlives:]

What is the probablility that other Canadian trusts will follow the AAV precedent and cut dividends out entirely, even though they have the cash flow to pay them?

Mar 26 09:07 AM

[football frank:]

A good article about the long canadian dollar and short the US
dollar. Oil prices will rise sometime in the future for sure. Demand
is low at the moment, but there is no more cheap oil being found.
Not sure about energy trusts, I know they have a different tax
structure, and I beleave their payouts are taxed as interest
income, and not dividend income. If you are long oil, then you should be long the canadian dollar

Mar 26 09:20 AM

[BrunoT:]

The name "notagoldbug" tells me that they're not the clueless ones. The gold bugs seem to have done quite well for themselves in the last 8 years.


On Mar 26 08:42 AM notagoldbug wrote:

> you guys are clueless...canadian oil/gas trusts are to convert to
> corp by 2011 so just buy oil/gas stocks......NOW.......... trusts
> are leveraged and cuting their distributions .. yields are a false
> way to evaluate the investment merits....stay informed

Mar 26 09:23 AM

[football frank:]

A good article about the long canadian dollar and short the US
dollar. Oil prices will rise sometime in the future for sure. Demand
is low at the moment, but there is no more cheap oil being found.
Not sure about energy trusts, I know they have a different tax
structure, and I beleave their payouts are taxed as interest
income, and not dividend income. If you are long oil, then you should be long the canadian dollar Mar 26 09:20 AM |Report abuse| Link | Reply 00

Mar 26 09:24 AM

[longoil:]

notagoldbug,

A few comments:

1) The 2011 legislation has already been factored into the current pricing of income trusts.

2) In 2011, most income trusts will convert to a standard corporate structure and the income will be distributed as dividends. Corporations will pay taxes on the income before distribution, but since dividends have a more favorable tax treatment, you can recoup this tax paid by the corporation as a tax credit provided your income trust is held in outside a retirement account (i.e RRSP, LIRA, IRA, etc).

3) ) I have no problem with distribution cuts when the price of oil and gas drops or if the redirected cash is used for paying down debt faster (a good idea in this low interest environment) or acquiring new reserves.

4) Canroy and MLPs are not the same thing. MLPs distribute cash from depleting assets. Canroys are permitted to acquire new properties and replenish their assets, which MLPs are not permitted to do.

Mar 26 09:28 AM

[Uncle Pie:]

User 378912 should check the websites for the tax treatment to US owners of Canadian Income Trusts...the user will find that most are taxed as "qualified" dividends, sometimes with a non-taxable return of capital component. They are NOT taxed as interest. (As Yogi Berra said, "you could look it up!" The exception is Pengrowth, PGH, which has elected to be taxed in the US as a publicly traded partnership, so US investors will receive a K-1 at tax time, and take it from me, it's a doozy! As to the requirement that income trusts convert to tax paying corporations by 2011, the ramifications vary from company to company. Check the "management's discussion" on the companies' websites. For some, like Vermilion, the impact is small because most of their business is outside Canada. Some have "tax pools" that will allow them to avoid corporate taxes for several years after conversion. Others may have to reduce their distributions to pay the corporate tax. However, even if these distributions were cut 30-50%, the yields are still among the highest to be found anywhere. And as to the comments from notagoldbug, the notion that the Canadian oil and gas income trusts are some kind of ponzi scheme is patently false, if you look at the long term track record. The reserve replacement record is generally pretty good, although from time to time, there will be some disappointing results. If you are concerned about depletion, consider Canadian Oil Sands Trust, COSWF, which through its share in the Syncrude consortium, owns a supply of crude that is expected to last 40-50 years with NO production decline. Of course, there are other risks to contend with here, as with any investment. Readers are encouraged to view the investor presentations on the corporate websites, and look at the analysts' reports, and to take everything with a grain of salt. This writer owns shares of COSWF and and several other Canadian Income Trusts.

Mar 26 09:38 AM

[optionsgirl:]

I think beaten up, unloved AAV is a screaming buy down here at these prices.

Mar 26 09:41 AM

[Cliff Wachtel:]

Er, I guess you feel strongly about this.

Take a look at the info about these selections in the latest installment. They are all well run and at minimum able to survive, have relatively low debt or no debt, all are still expandingreserves, all but one continues to pay dividends despite a 60% fall in energy prices. They are definitely NOT risking their futures, at least not these trusts.

Moreover, destruction of future global supply resulting from this temporary energy price decline viturally guarantees new highs for these.

Curious to hear your thoughts once you've read the latest installment. Regards, Cliff


On Mar 26 08:40 AM notagoldbug wrote:

> you are clueless about cdn trusts as they are depleting assets based
> on issuing stock to make acq.......their yields are false and a blowdown
> IRR calculation needs to be done.....that being said the canadian
> government has givent then until 2011 to convert back to corporations
> and they will slash their payouts if they havent already
> stay informed

Mar 26 10:02 AM

[mc2406:]

Have the limitations on percentage of US investors in canroys been waived, or will they be waived when the 2011 law change occurs?

Mar 26 10:26 AM

[Steve Ward:]

US percentages have not been waved. Peyto looks good except for gas component which is 100 percent of their business.
AAV is a screaming buy and so will some others as soon as they cut out all dividends and truly go back to a sustainable model.
Re-cycle ratios are lousy on most of these trusts. Oil sands trust and Crescent Point look good as well as AAV and possibly Trilogy Energy Trust, if you think gas is not a bummer for another two years.

Mar 26 10:44 AM

[Whitehawk:]

Some of these oil trusts are still being shorted because of a threat of further dividend cuts. I won't list the ones I know are being shorted here, as I also know many people are long these names. But if you look at their price action it is pretty obvious. I think to buy them here you have to have a long-term horizon and may need to DCA down if they pull back further, which they will if oil pulls back to the 50 day MA.


On Mar 26 09:07 AM biomedlives wrote:

> What is the probablility that other Canadian trusts will follow the
> AAV precedent and cut dividends out entirely, even though they have
> the cash flow to pay them?

Mar 26 12:39 PM

[stockdoc06:]

Given the debt environment, most of the canroys have cut distributions to levels that make the company (including cap-ex) cash flow positive. Look at PGH's latest presentation for the value creation proposition. They buy proven assets (yes they use stock, because cash flow is distributed) and use their expertise to squeeze more oil/gas out of the ground than the previous owner's projections. Hence, a good use of capital because they are buying assets and able to use those assets to create more value. Many canroys also have undeveloped leaseholds that can be used for future exploration. The only argument you can make against these is the same arguement you make against any oil/gas company and that is that prices are going down. Good luck with that one. Let's talk about it in 10 years. I'll buy you a sandwich with my gold/silver/oil and we can use your dollars as napkins.


On Mar 26 08:40 AM notagoldbug wrote:

> you are clueless about cdn trusts as they are depleting assets based
> on issuing stock to make acq.......their yields are false and a blowdown
> IRR calculation needs to be done.....that being said the canadian
> government has givent then until 2011 to convert back to corporations
> and they will slash their payouts if they havent already
> stay informed

Mar 26 12:44 PM

[Whitehawk:]

Racy article coming from a CPA! I like it. However I wouldn't be long the ultrashort vehicles, I would day trade them here, just like I would day trade the ultralongs. Like today when the market is up and there is no fundamental raison d'etre IMHO. To go long on the ultrashorts now proves you either have significant moxie or you'll get stopped out will a lot of little losses, depending on how many positions you have.

***Note to the author: you are convinced of a downtrend from here - can you be a little more prognosticating on that? Would like to know where you think the bottom is and why.

Mar 26 12:44 PM

[William Mac...:]

What about double taxation on Canadian investments? Isnt it bad enough to have to pay income tax to one country?

Mar 26 02:17 PM

[User 309024:]

U.S. MPLs are certainly not prohibited from acquiring assets, they do it on a regular basis, e.g. TC Pipelines originally owned 30% of Northern Border but has acquired Tuscarora Pipelines (now 100%), Great Lakes (46.5%) and another 20% of Northern Border. U.S Royalty trusts are the ones unable to add assets.

Charlie in Maryland

Mar 26 02:20 PM

[Cliff Wachtel:]

Good point. I own PGH myself, but wanted to do some more research before adding it to my current recommendations.


On Mar 26 07:53 AM rickf wrote:

>
> I'd add Penngrowth (seekingalpha.com/symbo...) as a reliable
> CanRoy - from what I have seen in my own research, the firm cut its
> dividend (still pretty nice though) and is the best-hedged in terms
> of guarding against oil volatility....I think they're like 55% hedged
> or something, far more than their peers up north.
>
> Disclosure: Long PGH via shares and short puts

Mar 26 03:55 PM

[Cliff Wachtel:]

Also a candidate for the list. Will look further into it. Lots of interesting prospects in this sector, but wanted to limit the list. thanks for your input. Cliff


On Mar 26 08:31 AM longoil wrote:

> I would also add the two following Canroys in addition to ERF.<br/>
>
> COSWF.PK is a well management company with oil sands reserves greater
> than 40 yrs. Yield is currently 12% and it is trading at 50% of its
> 2008 high.
>
> PWE is another excellent Canroy. Yield is 28% and its reserve life
> is 10 yrs. It is trading at 33% of its 2008 high and I would expect
> the yield to be cut to half at some point.

Mar 26 03:58 PM

[Cliff Wachtel:]

oh yeah. thanks for for your input, Cliff


On Mar 26 09:41 AM optionsgirl wrote:

> I think beaten up, unloved AAV is a screaming buy down here at these
> prices.

Mar 26 04:00 PM

[Cliff Wachtel:]

If you're referring to the 15% witholding tax Canada charges foreign shareholders, Americans can get a tax credit by filing form 1116 with the IRS with your return. If you refer to tax at corp and personal level, divies will still be high on the better trusts, especially if buying at current prices and on panic dips. Regards, Cliff


On Mar 26 02:17 PM User 297125 wrote:

> What about double taxation on Canadian investments? Isnt it bad enough
> to have to pay income tax to one country?

Mar 26 04:04 PM

[Cliff Wachtel:]

If you refer to the 15% Canadian witholding for non Canadians, Americans can get it back as a tax credit by submitting form 1116 to the IRS. If you're referring to corp and personal level, the better trusts will continue to pay high yields, especially if buying at current prices or on panic dips. Many of the trusts have pools of tax credits and other means of delaying the effects of the 2011 tax changes. Hope that helps. Regards, Cliff


On Mar 26 02:17 PM User 297125 wrote:

> What about double taxation on Canadian investments? Isnt it bad enough
> to have to pay income tax to one country?

Mar 26 04:24 PM

[Cliff Wachtel:]

Right, for the good trusts, divy cuts have been to preserve the long term health of the company and continue capex for future growth rather than short term share performance. I've no problem with that, it's the smart move, and wish there was more of that kind of thinking in US boardrooms. Regards, Cliff


On Mar 26 12:44 PM stockdoc06 wrote:

> Given the debt environment, most of the canroys have cut distributions
> to levels that make the company (including cap-ex) cash flow positive.
> Look at PGH's latest presentation for the value creation proposition.
> They buy proven assets (yes they use stock, because cash flow is
> distributed) and use their expertise to squeeze more oil/gas out
> of the ground than the previous owner's projections. Hence, a good
> use of capital because they are buying assets and able to use those
> assets to create more value. Many canroys also have undeveloped leaseholds
> that can be used for future exploration. The only argument you can
> make against these is the same arguement you make against any oil/gas
> company and that is that prices are going down. Good luck with that
> one. Let's talk about it in 10 years. I'll buy you a sandwich with
> my gold/silver/oil and we can use your dollars as napkins.

Mar 26 04:28 PM

[TucsonSpike:]

I had four large positions in CanRoys during the Halloween Massacrer, hit very hard before opening the next day. So why would one invest in an unstable government so willing to confiscate one's money in a way that doesn't allow for an orderly process? The excuse given was that other corporations were considering conversion to the Income Trust form, but this is a ruse. All they had to do was suspend conversions while they explored the issue further. This is the stuff of Venezuela. I refer to our neighbors to the North as BROC, Banana Republic Of Canada. There is no reason to believe their bad behavior won't continue, and investors will be burned again.

Mar 26 04:45 PM

[MikeyLV:]

Just a quick note, even with the Canadian tax, the yields are high enough for the canroys to sit in an IRA.

Mar 26 06:47 PM

[Jezebel:]

Is there an ETF that tracks these canroys? Owning individual stock is all very well, but you have to be on the ball and track each company in the portfolio to make sure you aren't missing any developing red flags. I did find XEG as a tracking fund. Although the yield is only 4.5%, it would seem like an easier and more diversified play?

Mar 26 08:12 PM

[jmorr:]

Instead of C$, a better commodity based economy is Australia, and they have a budget surplus to boot, and less exposure to the U.S. economy.

Mar 26 08:14 PM

[mplaut:]

IMO one of the best Canadian royalty trusts just announced that it will convert to a corporation and continue to pay a high dividend: Crescent Point Energy. Very well managed, aggressively hedged, a big player in the high netback Canadian Bakken area. CPGCF in the US and CPG-UN.TO, but I guess it will lose the UN once it becomes a regular corporation.

Mar 26 08:19 PM

[Jezebel:]

jmorr - I agree about Australia. I have heard rumors about a potential housing bubble there, but they don't seem credible. For US investors, Australia is a commodity play, a US$ hedge, a China play and it has one of strongest economies right now. Personally, I am investing in both Canada and Australia, with some Hong Kong/China as well.

Mar 26 10:24 PM

[Private Trader:]

Thanks for pointing out how these Canadian companies, and PGH, are not only profitable - but also great ways to diversify a portfolio with most of its holdings in the US dollar. Also, appreciate jmorr and Jezebel's mention of Australia.

Mar 27 04:57 AM

[notagoldbug:]

i love my SUNCOR and Gold stocks wouldnt touch a oil/gas royalty except for progress

i love gold but not a gold bug...I am already a millionaire so the goof that said I will use his dollars as napkins i laugh at you.....

I was part of a trust called Starcor acquired by arc in 1998
long before you americans , were buying them. BTW thanks for buying my Oil/gas trusts i got out with huge valuation premiums....KEEP loading up the truck

BTW the way ladies LOVIN your money

FVI.v fortuna silver i have acquired a big position silver is better than gold.....

Mar 27 05:54 AM

[Thrift Maven:]

ETF DHG holds some of these trusts. Good dividend, good discount,
sad history. It may revive handsomely someday. If you close your eyes and like getting paid (something) to wait, take a look at DHG.

Mar 27 11:57 AM

[never-too-o...:]

What is the story on HTE?

Mar 27 03:42 PM

[PeteK:]

The socialist Canada will tax this dividend to death
starting 2011. Not fuuny.

Mar 27 11:49 PM

[max12345:]

I am absolutely delighted to note that you (Cliff Wachtel) have NOT managed to convince everyone above (based on the various comments thus far posted) that Canadian energy trusts and in fact Canadian income trusts in general are an unbeatable investment value. (for all the reasons you have already very accurately listed and described)

If you had succeeded that would have been the absolutely surest way of wrecking this little known and even less properly understood investment vehicle. (for half of U.S. investors who recently have lost their shirts to suddenly try to lurch into them immediately, thereby either completely distorting the market or soon messing up the good deal that it has been and continues to be for Canadians; or bringing on legal changes in Canada to forbid further investment in them by foreigners, which is something already being toyed with)

(every country of course does have a right to set up its own gigs for its own people and the U.S. certainly has its own fair share)

But as far as the 2011 proposed legal changes are concerned they still may or may not actually happen because messing around too much with what is a very good gig for Canadians (retirees and pensioners in particular) easily could bring down any (truly) eager-beaver Canadian government getting too greedy for more tax revenues.

Something which moreover also would be a very misguided policy for other reasons since the income trust sector is one that is thriving, expanding, creating lots of jobs, and generally promoting SMEs very effectively, as well as bringing in more foreign investment into Canada. So even "conservatives" (if they had any sense at all and were not just a different variant of populist demagogues themselves) would leave it alone.

And as far as AAV specifically is concerned, it did not "cut its dividend" because it never paid one. What it cut (eliminated) was its "distribution" and precisely because it is an income trust and not a corporation.

Though apparently it also has indeed decided to convert "early" into a corporation. (thereby needlessly jumping the gun) And wasn't it once again Yoga Berra who once said "it's not over 'til its over"?

But AAV's share price (rather than unit price) undoubtedly will see a significant rise soon anyway since as a corporation it will be permitted to retain earnings and re-invest them in the business rather than paying them out. (to distribution-hungry and unbelievably greedy investors such as myself... and of course to many others too)

But investors will win in either case: either they will continue to receive fat distributions, or later (if conversion actually takes place) they will see rising share prices since all those trusts were able to survive AND pay out fantastic distributions anyway, so if and when they will convert into corporations they will do even better ...because they'll have more spare cash to re-invest or to use for Capex (thus lowering borrowing costs) and etc. etc

Though it's also true that the government(s) of Canada - both federal and provincial- will of course try to grab just as much of that extra cash as they can get their filthy hands on. (though most likely still slightly cleaner than those of U.S. federal, state and local governments and "authorities")

And as far as the energy trusts' "depleting resources" argument is concerned...most of them hold proven (and easy to extract) oil and gas reserves of at least 10 years and probable (and somewhat more difficult) reserves for at least another ten...and they are in any case continuing active (and so far very successful) exploration programs aimed precisely at replacement of depleted assets and in some of the most promising oil and gas patches left on earth. So the misunderstanding is regarding the above and not what was mentioned in one of the comments.

And so have I now finally managed to DEFINITELY convince ALL the skeptics? I certainly hope NOT (just as I also hope that Mr. Wechtel has failed and will continue to fail miserably through his ever more prolific and articulate and very well written set of articles surely to just continue to flow in ongoingly (much like the oil from all those trusts or like the energizer battery and its rabbit, even though all basically about the same thing by now)

And this strong desire for failure is not borne out of any perversion or sense of masochistic self-deprecation (or sadistic, vis a vis the good Mr. Wechtel) (and many thanks for your great set of articles) but just so that one of the few remaining poorly known but excellent investment vehicles is not soon overwhelmed by "everybody and his brother"...which for those of us who already have known about all of this stuff for quite some time (and have happily been collecting monthly) would certainly be something exceptionally under-whelming.

But in reality, I am NOT worried, since typically most people do NOT listen to good advice because they are already hermetically convinced about whatever it is they already believe in. This sort of stubbornness is precisely what presents fantastic opportunities for those others who are mentally at least just a tiny bit more nimble and also a bit more interested in (and grounded in) the empirical evidence that may be involved in any issue that may concern them.

Forewarned (and well advised) is forearmed. (but please feel free to keep buying e-bay, apple or even exxon-mobil instead)

Mar 28 03:06 AM

[ikeone:]

starting buying ERF and PVX years ago, adding shares on weakness. From their highs, both have cut their dividends by about 70%, and obviously the lower they have fallen, the faster they cut. I have substantial holdings in both, and a combined loss of $60,000 on the shares. Adding insult, the Canadian dollar was at parity when I was buying the bulk of my shares, now it has weakened by about 20% against the US dollar...resulting in a further drop in actual $$$ from dividends. And, if you have any shares in tax deferred accounts, you also lose the 15% tax withheld by the Canadian government.
All I am suggesting is that there are unintended and unexpected events with most investments. Be prepared for them! Good luck.

Mar 28 02:36 PM

[bill d:]

I ain't worried until Timmy can figure out to get his greedy little fingers into it. Millionaires are a dime a dozen - like Trump. Damn near was one myself not too long ago. So what ?

AAV, PWE, PVX, PBT

Mar 28 03:08 PM

[socphd71:]

1. I don't file a Form 1116 and the IRS hasn't objected to my small (< USD10) deduction for Canadian taxes. There must be some lower limit (in practice) under which the IRS doesn't require a Form 1116.

2. My wife and I do our own taxes and we file as early as possible. My biggest concern about these Royalty Trusts is: Are they required to send out their income tax statements by mid-February as are US corporations? Next, do their dividends qualify for the 15% US federal tax rate?

3. I disagree about investing in Australia. (a) Check out their housing bubble. I think it is only a bit behind the US, UK, Irish Republic, Spain, etc. (b) They have also suffered through five years of drought and heat waves. The government must be suffering a major shortfall of tax revenues, though I haven't looked this up. IMO, Australia is one of the first countries which is suffering terribly from global warming (global climate change, if you prefer).

Mar 28 08:43 PM

[d_teller:]

To socphd71:

I believe the limit on 1040 foreign tax credits (without filing form 1116) is $400.00 U.S. ...but you could check the irs.gov site and the directions for the Fed Pub 17 (the summary guide to the 1040), which means in a taxable account you probably could receive >$2650.00 in Cdn dividends, before filling out form 1116.

Unless you buy your Cdn Trust securities from the issuer directly, all the required info will be on the 1099 that a brokerage sends...the dates and $ for purchases, sales, dividends, any non-taxable returns of capital...with the exception of any Publicly Traded Partnerhips, such as PGH, which send a fairly detailed K-1 form directly, and not via a 1099 (the brokerage doesn't send any K-1s), and that can come as late as March 30th.

Nearly all the CanRoys' dividends are qualified, and for U.S. investors, many of the Cdn REITs also issue qualified dividends. One thing to watch for ---in a taxable account---are "Stapled Units' which pay interest on a bond plus dividends (these also are known as EIS', etc.) and are common in the U.S and overseas...for taxable accounts, the portion of the distribution that is from the bond interest is not qualified for the reduced 15% rate.

Mar 28 09:39 PM

[Cliff Wachtel:]

See part 7B.


On Mar 26 09:07 AM biomedlives wrote:

> What is the probablility that other Canadian trusts will follow the
> AAV precedent and cut dividends out entirely, even though they have
> the cash flow to pay them?

Mar 29 11:42 AM

[Cliff Wachtel:]

Good point. No doubt a risk, I still don't understand why a government that until that moment seemed reasonably rational and pro investment would do it. Need to research the motive behind the move, since there were a number of far more sensible ways to deal with the lost tax issue IF in fact that was the reason for the wholesale elimination of this asset class. Cliff


On Mar 26 04:45 PM TucsonSpike wrote:

> I had four large positions in CanRoys during the Halloween Massacrer,
> hit very hard before opening the next day. So why would one invest
> in an unstable government so willing to confiscate one's money in
> a way that doesn't allow for an orderly process? The excuse given
> was that other corporations were considering conversion to the Income
> Trust form, but this is a ruse. All they had to do was suspend conversions
> while they explored the issue further. This is the stuff of Venezuela.
> I refer to our neighbors to the North as BROC, Banana Republic Of
> Canada. There is no reason to believe their bad behavior won't continue,
> and investors will be burned again.

Mar 29 11:49 AM

[Cliff Wachtel:]

Thanks for your kind words. I share both your enthusiasm for this class of investments (even with its risks) and confidence that I'm not going to cause any mass move into these. In the words of Paul Simon, "a man hears what he wants to hear and disregards the rest." Cliff


On Mar 28 03:06 AM max12345 wrote:

> I am absolutely delighted to note that you (Cliff Wachtel) have NOT
> managed to convince everyone above (based on the various comments
> thus far posted) that Canadian energy trusts and in fact Canadian
> income trusts in general are an unbeatable investment value. (for
> all the reasons you have already very accurately listed and described)
>
>
> If you had succeeded that would have been the absolutely surest way
> of wrecking this little known and even less properly understood investment
> vehicle. (for half of U.S. investors who recently have lost their
> shirts to suddenly try to lurch into them immediately, thereby either
> completely distorting the market or soon messing up the good deal
> that it has been and continues to be for Canadians; or bringing on
> legal changes in Canada to forbid further investment in them by foreigners,
> which is something already being toyed with)
>
> (every country of course does have a right to set up its own gigs
> for its own people and the U.S. certainly has its own fair share)
>
>
> But as far as the 2011 proposed legal changes are concerned they
> still may or may not actually happen because messing around too much
> with what is a very good gig for Canadians (retirees and pensioners
> in particular) easily could bring down any (truly) eager-beaver Canadian
> government getting too greedy for more tax revenues.
>
> Something which moreover also would be a very misguided policy for
> other reasons since the income trust sector is one that is thriving,
> expanding, creating lots of jobs, and generally promoting SMEs very
> effectively, as well as bringing in more foreign investment into
> Canada. So even "conservatives" (if they had any sense at all and
> were not just a different variant of populist demagogues themselves)
> would leave it alone.
>
> And as far as AAV specifically is concerned, it did not "cut its
> dividend" because it never paid one. What it cut (eliminated) was
> its "distribution" and precisely because it is an income trust and
> not a corporation.
>
> Though apparently it also has indeed decided to convert "early" into
> a corporation. (thereby needlessly jumping the gun) And wasn't it
> once again Yoga Berra who once said "it's not over 'til its over"?
>
>
> But AAV's share price (rather than unit price) undoubtedly will see
> a significant rise soon anyway since as a corporation it will be
> permitted to retain earnings and re-invest them in the business rather
> than paying them out. (to distribution-hungry and unbelievably greedy
> investors such as myself... and of course to many others too)
>
> But investors will win in either case: either they will continue
> to receive fat distributions, or later (if conversion actually takes
> place) they will see rising share prices since all those trusts were
> able to survive AND pay out fantastic distributions anyway, so if
> and when they will convert into corporations they will do even better
> ...because they'll have more spare cash to re-invest or to use for
> Capex (thus lowering borrowing costs) and etc. etc
>
> Though it's also true that the government(s) of Canada - both federal
> and provincial- will of course try to grab just as much of that extra
> cash as they can get their filthy hands on. (though most likely still
> slightly cleaner than those of U.S. federal, state and local governments
> and "authorities")
>
> And as far as the energy trusts' "depleting resources" argument is
> concerned...most of them hold proven (and easy to extract) oil and
> gas reserves of at least 10 years and probable (and somewhat more
> difficult) reserves for at least another ten...and they are in any
> case continuing active (and so far very successful) exploration programs
> aimed precisely at replacement of depleted assets and in some of
> the most promising oil and gas patches left on earth. So the misunderstanding
> is regarding the above and not what was mentioned in one of the comments.
>
>
> And so have I now finally managed to DEFINITELY convince ALL the
> skeptics? I certainly hope NOT (just as I also hope that Mr. Wechtel
> has failed and will continue to fail miserably through his ever more
> prolific and articulate and very well written set of articles surely
> to just continue to flow in ongoingly (much like the oil from all
> those trusts or like the energizer battery and its rabbit, even though
> all basically about the same thing by now)
>
> And this strong desire for failure is not borne out of any perversion
> or sense of masochistic self-deprecation (or sadistic, vis a vis
> the good Mr. Wechtel) (and many thanks for your great set of articles)
> but just so that one of the few remaining poorly known but excellent
> investment vehicles is not soon overwhelmed by "everybody and his
> brother"...which for those of us who already have known about all
> of this stuff for quite some time (and have happily been collecting
> monthly) would certainly be something exceptionally under-whelming.
>
>
> But in reality, I am NOT worried, since typically most people do
> NOT listen to good advice because they are already hermetically convinced
> about whatever it is they already believe in. This sort of stubbornness
> is precisely what presents fantastic opportunities for those others
> who are mentally at least just a tiny bit more nimble and also a
> bit more interested in (and grounded in) the empirical evidence that
> may be involved in any issue that may concern them.
>
> Forewarned (and well advised) is forearmed. (but please feel free
> to keep buying e-bay, apple or even exxon-mobil instead)
>
>

Mar 29 11:55 AM

[Cliff Wachtel:]

Yes. A key point is that these are bets on energy prices, for good and bad. The overwhelming good is that under all but the worst case scenario the income alone justifies them, and that energy is a very good long term bet for capital appreciation as well. We are in the ultimate "dip" to buy, though defintely may yet see worse in the near term. Cliff


On Mar 28 02:36 PM ikeone wrote:

> starting buying ERF and PVX years ago, adding shares on weakness.
> From their highs, both have cut their dividends by about 70%, and
> obviously the lower they have fallen, the faster they cut. I have
> substantial holdings in both, and a combined loss of $60,000 on the
> shares. Adding insult, the Canadian dollar was at parity when I was
> buying the bulk of my shares, now it has weakened by about 20% against
> the US dollar...resulting in a further drop in actual $$$ from dividends.
> And, if you have any shares in tax deferred accounts, you also lose
> the 15% tax withheld by the Canadian government.
> All I am suggesting is that there are unintended and unexpected events
> with most investments. Be prepared for them! Good luck.

Mar 29 11:59 AM

[Cliff Wachtel:]

Depends on the situation of the individual trust, and if prices for their products stabilize. If oil and gas prices stay around $50 then we've probably have most of the cuts behind us. Lower prices will mean lower revenues, possibly more cuts. Possible that there will be individual situations in which hedges come off and/or costs rise which also reduce cash and force a cut. Best to follow the Management Discussion and Analysis that comes with each quarterly report for in depth look at the specific situation of the individual trust in question. cliff


On Mar 26 09:07 AM biomedlives wrote:

> What is the probablility that other Canadian trusts will follow the
> AAV precedent and cut dividends out entirely, even though they have
> the cash flow to pay them?

Mar 29 04:59 PM

[sr9web:]

PWE now yielding 15% - dividend was CUT AGAIN this month!


On Mar 26 08:31 AM longoil wrote:

> I would also add the two following Canroys in addition to ERF.<br/>
>
> COSWF.PK is a well management company with oil sands reserves greater
> than 40 yrs. Yield is currently 12% and it is trading at 50% of its
> 2008 high.
>
> PWE is another excellent Canroy. Yield is 28% and its reserve life
> is 10 yrs. It is trading at 33% of its 2008 high and I would expect
> the yield to be cut to half at some point.

Mar 29 11:49 PM

[Jay Blue:]

Dear Mr. Wachtel,

Could you please explain how you arrived to a price per share for ERF that is twice the current one, without counting the oil sands? Also could you please elaborate on the value of their oil sands assets? Finally, could the company be subject to a takeover by another player?

I am looking forward to your comments.
Thank you
Regards,
Jay

Apr 01 06:01 PM

[mind_geek:]

Isnt the point of dividend investing to have stability? 12% dividends are great until your stock drops 90% because the government gets involved in running the private sector. I think these CET's are speculation at this point and not for the income investor who likes to sleep at night. A few years ago, they were about the best thing going for yield and mild stability.

Guess Im rather surprised that people here are getting excited about cut dividends and lost capital. If you want yield and some non-correlation to the US and its crumbling stock market, Emerging/Sovereign market debt funds (GIM, TEI, PCF) have much more stability than these dogs!

I know its after the fact...but whenever the Gov starts to talk about changing the structure of a certain investment or industry..get out fast! When 2011 rolls around and the picture is clearer, that would be a much safer time to try these CEF's in my opinion.

Jul 02 07:24 PM