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Dale Jackson

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Sifting through the wreckage

Dale Jackson


The creators of the turn-of-the-century blockbuster movie Castaway, must have known a thing or two about investment fundamentals. The central character Chuck Nolan - played by Tom Hanks - is flying in a cargo plane when sudden turbulence brings it crashing into the ocean. He washes up on a deserted island and discovers he is alone.

To survive, he combs the wreckage looking for useful items. He eventually discovers a figure skate can double as a coconut splitter, a washroom door comes in handy as a sail and a volleyball named Wilson is his best pal.

In much the same way many investment portfolios fell from the sky last Halloween Eve when the Federal government decided to close the loophole on the too-good-to-be-true income trust tax structure by 2011. In that week alone the average income trust plunged 15 per cent - reflecting the value investors had placed on the tax status of income trusts.

Like Chuck Nolan, Canaccord Adams has been sifting through the debris looking for value. In a post-loophole world, researchers found income trusts with solid fundamentals - even without the special tax status - that are currently trading below their defined value.

First, the annual return target for the entire sector was lowered from 37 per cent before the trust tailspin, to 23 per cent after - reflecting a tax-status premium of 14 per cent.

They brushed the sand off each trust, took a closer look, and selected seven energy trusts which met their value criteria - "names that have a strong balance sheet, high yield, large tax pools, and/or are trading below or near the net asset value". Two are large caps, three small to mid caps, and two are small caps ripe for a merger or acquisition.

The two large caps are Canadian Oil Sands Trust and Canetic Resource Trust. Canadian Oil Sands is a pure Oil Sands play with a 35.5 per cent working interest in the Syncrude project. The Syncrude project is a joint venture involving oil patch giants such as Imperial Oil, Petro-Canada, ConocoPhillips and Nexen. At last check Canadian Oil Sands was trading at $29.62 per unit but Canaccord Adams has valued it at $33.00. Before Halloween the price target on Canadian Oil Sands was $36.00.

Canetic produces oil and natural gas in Western Canada, forming last January in a merger between Acclaim Energy Trust and Starpoint Energy Trust. At last check Canetic was trading at $15.07 per unit - well below the current Canaccord target price of $19.00.

The three small- to mid-cap trusts salvaged from the trust wreck are Crescent Point Energy Trust, Daylight Resources Trust and Fairborne Energy Trust. Crescent Point is a conventional oil and gas trust with assets focused in light oil and natural gas properties in Western Canada. Canaccord has knocked its new target price down by $2 to $21. It's still staggering at $16.60 per unit.

Daylight Resources Trust specializes in the exploration and production of petroleum and natural gas. It was trading at $10.18 per unit in mid November and the Canaccord target price was $15.00 - dropped two dollars from before the trust ruling from Ottawa.

The target price for Fairborne Energy Trust has been lowered from $14 to $12.50 and it traded in mid November at $9.12. Fairborne was converted to a trust in 2005 and currently owns 90 per cent of Fairquest limited - an exploration company operating on nearly 200,000 square acres of undeveloped land in Western Canada.

Cannacord Adams has also singled out two small cap income trusts as takeover or merger targets. Vault Energy Trust is currently part of the Canadian Coalition of Energy Trusts - a lobby group formed after the trust announcement to push the federal government to reverse its decision. A reversal from Ottawa seems unlikely at this point, so Vault's target price is $7 after being lowered a dollar. Vault's unit price at last check was $5.37.

The second merger or acquisition target with a 'buy' recommendation is Thunder Energy Trust. The Thunder Trust was created in July 2005 with the merger of Thunder Energy, Mustang Resources and Forte Resources. It was just one in a flurry of trust conversions in the summer of 2005. Thunder trades at about $5.52 but Canaccord Adams says it's worth $8 after lowering its target price from $9.

It's important to keep in mind markets are volatile and target prices can only withstand a certain amount of market and economic turbulence. There's no guarantee a plane, or a broken government promise, won't fall from the sky. Even Wilson knows that.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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