It’s one thing for me to keep hammering away about the values that exist in the Canadian oil and gas trust sector. It’s another entirely for the market to shout it out, particularly after the group’s recent weakness.

Today, we got that confirmation: Two wholly-owned subsidiaries of Abu Dhabi National Energy Co PJSC have submitted an all-cash bid of CD26.75 per share for PrimeWest Energy Trust (PWI.UN, NYSE: PWI).

The news is obviously bullish for holders of the former Shiningbank Energy Income Fund—which merged into PrimeWest earlier this year—as well as other holders of the heavily gas-weighted trust. Based on a current exchange rate of near parity between the US and Canadian dollars, it represents a huge premium of close to 40 percent on PrimeWest’s pre-deal price. That wipes out much of the past year’s pain in one fell swoop.

Those who currently hold PrimeWest should continue to do so. For one thing, the all-cash nature of the bid limits downside risk. For another, we have until the projected shareholder vote on Nov. 30 for a counterbid to emerge. That could happen if natural gas prices bounce back. And PrimeWest has pledged to maintain its 25-cent-Canadian monthly dividend until the deal closes.

This deal, however, also has immense significance for the entire oil and gas trust sector, as well Canadian income trusts as a whole. For the latter, it’s the first major takeover of any trust to be announced since the US subprime mess became critical this summer. It’s a clear signal that trust takeovers—none of which have been cancelled to date—are still very much alive and well and that prospective buyers are willing to pay top dollar for these assets.

Just as important, this is also the first major takeover we’ve seen of an oil and gas trust, outside of the real basket cases such as former Thunder Energy Trust. And it comes just days after the Alberta government report proposing higher royalties on the oil and gas industry (see the Sept. 20 Flash Alert), with potentially lower royalties on the mature fields owned by most trusts.

Those facts haven’t been lost on the market, and today we’re seeing trusts bid up across the board in response. All of the core Canadian Edge energy producers are up sharply, including ARC Energy Trust (AET.UN, AETUF), Enerplus Resources  (ERF.UN, NYSE: ERF), Penn West Energy Trust (PWT.UN, NYSE: PWE), Peyto Energy Trust (PEY.UN, PEYUF), Provident Energy Trust (PVE.UN, NYSE: PVX) and Vermilion Energy Trust (VET.UN, VETMF). So are our more leveraged gas producers Advantage Energy Income Fund (AVN.UN, NYSE: AAV) and Paramount Energy Trust (PMT.UN, PMGYF).

Given the huge premium paid for PrimeWest, the prospective gains on all these trusts in a takeover would be substantial. And despite today’s action, all of them trade below my buy targets, some well below.

Following the line that gas producers are more attractive to buyers, that bodes very well for Advantage, Paramount and even Peyto. Peyto’s long-life reserves make it arguably the strongest of the three, and it should logically command the greatest premium. But ultimately, it says very good things about the value of all strong oil and gas producers.

The one group I would remain very cautious about is the real basket cases. Enterra Energy Trust (ENT.UN, NYSE: ENT), for example, is seeing a very nice move today. But we’re still talking about a company at risk of bankruptcy if natural gas prices deteriorate further. Even in a best case, a takeover isn’t going to make back the money lost. And with the best trusts likely to go for massive premiums—and pay you while you wait—it just doesn’t make sense in my view to take that chance.

Remember, oil and gas production is fundamentally a cyclical business. This year, trusts have been the beneficiaries of rising oil prices. But they’ve simultaneously been hammered by lower gas prices and the rising Canadian dollar—which has depressed oil in Canadian dollar terms because oil is priced in US dollars on world markets.

There are many high-quality trusts built to last and in fact to survive prospective 2011 taxation should they remain independent. These are the ones I continue to focus on; I’ll have a comprehensive article on in the October Canadian Edge (Friday, Oct. 5). But there’s also a lot of junk still out there, and even the best trusts are vulnerable to volatility in the energy market.

As I said last week, if your goal is purely income, you want to be in the Canadian Edge Conservative Portfolio holdings. These are growing, noncyclical businesses that generate a lot of cash flow and are in good shape to keep paying big dividends even if taxed as corporations in 2011. And they’re not vulnerable to swings in energy prices.

If you’re prepared for the volatility, however, my view is you’re going to do extremely well with the Canadian Edge Aggressive Portfolio. That includes good energy stocks selling cheaply and paying the highest dividends in the world—which are now bona fide candidates for high premium takeovers.