The more than halving of oil and natural gas prices since mid-summer is catching up to some energy producer trusts’ distributions. ARC Energy Trust (TSX: AET-U, OTC: AETUF) is rolling back the first half of its “top-up” dividend increase, leaving the distribution back at its base rate of the past several years.

ARC remains a buy up to USD30 and is discussed in detail in the High Yield of the Month section. Enerplus Resources Trust (TSX: ERF-U, NYSE: ERF) cut its payout 19 percent to a monthly rate of 38 cents Canadian per unit. Nonetheless, Enerplus Resources Trust remains a buy up to USD40 and is profiled in the Portfolio section.

By far the steepest payout cut thus far was from Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF), which slashed its distribution 40 percent to a quarterly rate of 75 cents Canadian a share. The trust realized an average selling price of CAD127 a barrel for its oil in the third quarter. That figure, however, is likely to fall considerably in the fourth quarter.

Looking ahead, Oil Sands will likely face another reduction unless oil prices can stage a rebound. The current rate is still 150 percent above the level paid a year ago, and falling revenue will require the trust to shepherd more cash in order to comply with its debt covenants. That was a major reason why the Dominion Bond Rating Service elected to cut the trust’s stability rating last month to STA-4 (middle), even though it confirmed its overall BBB credit rating.

Canadian Oil Sands is basically the trading stock for Syncrude, an oil sands development venture backed by a consortium of major oil companies that’s operated by a unit of ExxonMobil. Despite ramping up its debt load recently, it’s in no danger of insolvency and the players are certainly capable of riding out the current downturn in the energy sector. In my view, the shares would be worth riding out another distribution cut, but they’re not a bargain as long as that’s a risk. Hold Canadian Oil Sands Trust.

Note as I stated in last month’s Feature Article, all energy producing trusts are at risk to distribution cuts, pending what happens to energy prices. More important, however, share prices are back where they were when oil was selling for less than $30 a barrel. After the recent liquidation sale, the market is pricing in far worse than dividend cuts. In fact, as we saw with the late October surge in ARC and Enerplus, these trusts are cheap enough to rally following dividend cuts, as uncertainty is cleared away.

That’s the main reason I continue to recommend hanging onto all but a few of the oil and gas trusts, including Harvest Energy Trust (TSX: HTE-U, NYSE: HTE). The trust’s refining business will almost certainly have to wait on improved credit market and economic conditions to expand. But that division should report much better results going forward than the break even cash flow of the previous quarter. In any case, there don’t appear to be solvency questions here, which is certainly what’s implied by a 30 percent plus yield. Hold Harvest Energy Trust.

That statement can’t be made about dividend cutters in other industries, with the exception of trusts converting to corporations early. Algonquin Power Income Fund’s (TSX: APF-U, OTC: AGQNF) “October surprise” dividend cut cost its shareholders dearly, more than halving the share price despite no discernable weakness to its underlying business. Its move, which amounts to an early conversion to a corporation in a way that doesn’t require shareholder approval, is discussed in the Portfolio section. Algonquin Power Income Fund is a sell.

In contrast, CI Financial Income Fund’s (TSX: CIX-U, OTC: CIXUF) management made no bones about its desire to move to a corporate structure. CEO William Holland in effect telegraphed the conversion with his opposition to the Liberal Party’s efforts to reopen trust taxation in the recent election. And on Oct. 15—in the teeth of the market panic—the trust announced its intentions, accompanied by a 76.5 percent distribution reduction.

Predictably, the cut drove down CI’s share price sharply, but it’s since stabilized. In my view, the best idea for unitholders is to hold onto their shares of CI Financial Income Fund past the conversion, which should take place by the end of the year.

This is a solid franchise with plenty of opportunity to grow. It’s considerably less attractive now as an income investment. But the stability of the underlying business and its potential as a takeover target should trigger a rebound in the coming months, as a new group of more growth-oriented investors move in. Hold CI Financial Income Fund. Note fellow financial services player GMP Capital Trust (TSX: GMP-U, OTC: GMCPF), which cut distributions 52 percent last month, is highlighted in the Portfolio section.

FP Newspapers Income Fund (TSX: FP-U, OTC: FPNUF) suspended its distribution in response to a labor strike last month. Within a week of the announcement, management announced a settlement calling for 2 percent wage increases in each of the next four years as well as benefits. That convinced management to free up the scheduled payment for Oct. 30, though it held open the possibility of a further suspension of distributions going forward. FP trades at just 90 percent of book value and odds are the dividend will be restored. But with advertising weak, there’s the potential for further erosion of cash flows. Hold FP Newspapers Income Fund.

Newport Partners Income Fund (TSX: NPF-U, OTC: NWPIF) is suspending its distribution indefinitely after the Oct. 16 payment. Management cited “unstable capital markets” and “the current economic slowdown” as its reasons for the move, and maintains that all of the investment company’s 17 businesses are “profitable.” With the shares selling off to just 11 percent of book value and 4 percent of annual sales, they’re arguably pricing in a lot. There don’t appear to be solvency issues, particularly given that all cash will now go to debt reduction. But no one should continue to hold unless they’re prepared for the risk of Newport going to zero.

Canada’s property market remains far healthier than the one south of the border. Nonetheless, two somewhat leveraged real estate investment trusts are feeling enough bite from a slowing economy to cut distributions: Huntingdon REIT (TSX: HNT-U, OTC: HURSF) and InStorage REIT (TSX: IS-U, OTC: INREF).

Of the pair, Huntingdon appears by far to be the worse off. Last month, the REIT announced the termination of attempts to sell itself to the highest bidder and completely suspended distributions, stating “it would be more prudent to utilize cash resources for the repayment of debt.” Management also announced a “unitholder rights” plan to prevent a hostile takeover at a low price.

Huntingdon’s portfolio of 79 industrial, retail and standalone parking lot facilities certainly looks cheap, selling at just 19 percent of book value. But with no distribution and some debt concerns in a softer economy, it’s not worth hanging around for, particularly with so many other REITs selling for a song. Sell Huntingdon REIT.

InStorage’s 56.3 percent distribution cut from 4.8 cents to 2.1 cents Canadian was also motivated by credit concerns, though from a somewhat stronger position. The REIT’s chairman stated the cut is “prudent given the current liquidity challenges in the financial and capital markets, and the resulting constraints this situation places on our continued external growth.

Management in this case is using the cash to refinance floating-rate mortgages and complete the takeover of InScotia Capital’s interests in eight storage facilities. The dividend cut, however, triggered a selloff in the price of the REIT’s units which, in turn, has attracted a hostile takeover offer of CAD3.75 per share in cash.

InStorage’s board has advised shareholders to reject the deal as “inadequate.” I fully agree the price is too low and that this is an attractive buy, particularly selling at just 53 percent of book value. The offer provides a useful floor for the share price and a spur to management to improve performance, and it could be worth taking if sweetened. InStorage REIT is now a buy up to USD3.25.

Here’s the rest of the Dividend Watch List. Second quarter payout ratios are now shown in How They Rate for all listed trusts and corporations. Note that Connors Brothers Income Fund (TSX: CBF-UN, OTC: CBICF) is back on the watch list and will remain there until its sale to a private equity firm for CAD8.50 per share in cash is complete, given tough credit conditions.

Acadian Timber Income Fund (TSX: AND-U, OTC: ATBUF)
Big Rock Brewery Income Trust (TSX: BR-U, OTC:
Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF)
Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF))
Connors Brothers Income Fund (TSX: CBF-UN, OTC: CBICF)
Essential Energy Services (TSX: ESN-U, OTC: EEYUF)
Extendicare Trust (TSX: EXE-U, OTC: EXMUF)
FP Newspapers Income Fund (TSX: FP-U, OTC: FPNUF)
Harvest Energy Trust (TSX: HTE-U, NYSE: HTE)
Jazz Airline Income Fund (TSX: JAZ-U, OTC: JAARF)
Mullin Group Fund (TSX: MTL-U, OTC: MNTZF)
Newalta Income Fund (TSX: NAL-U, OTC: NALUF)
Newport Partners Income Fund (TSX: NPF-U, OTC: NWPIF)
Precision Drilling Trust (TSX: PD-U, NYSE: PDS)
Swiss Water Decaf Coffee Fund (TSX: SWS-U, OTC: SWSSF)
TimberWest Forest Corp (TSX: TWF-U, OTC: TWTUF)
Tree Island Wire Income Fund (TSX: TIL-U, OTC: TWIRF)