“Most of the world’s heavy oil is similar to what is found in the Alberta/Saskatchewan belt,” reasons Chris Bloomer, Petrobank Energy & Resources’ (TSX: PBG, OTC: PBEGF) top executive on heavy oil projects. “What we learn from Kerrobert will have implications in many countries, from Venezuela and Colombia to China and Russia.”

Bloomer is referring to a project at Kerrobert, Saskatchewan, a joint venture between his company and Baytex Energy Trust (TSX: BTE-U, NYSE: BTE), one of the biggest heavy oil producers in Canada with 23,000 barrels a day of output. The project involves testing the efficacy of toe-to-heel air injection (THAI) in traditional heavy oil fields.

THAI is an in-situ combustion method for producing heavy oil invented by Dr. Malcolm Greaves in 1993 for which Petrobank holds the patent. THAI combines a vertical air injection well with a horizontal production well oriented in line to the vertical well.

Source: Petrobank Energy & Resources

Fed by air from the injection well, a combustion front sweeps the oil from the toe to the heel of the horizontal producing well. Estimates from experimental tests indicate that the process can recover as much as 80 percent of original oil-in-place while partially upgrading the crude oil in situ.

Petrobank has reported positive results from its test wells in the oil sands region. The oil produced was upgraded from 8 to 12 API degrees, and the company hopes to get a further 7-degree upgrade from its associated CAPRI (controlled atmospheric pressure resin infusion) system, which pulls the oil through a catalyzing nickel lining in the lower pipe.

Heavy oil is present all over the globe. In Saskatchewan, an estimated 20 billion barrels have yet to be recovered, in part because current technologies can’t get it. The CAD12 million Saskatchewan demonstration project is expected to produce 1,200 barrels per day; if successful Petrobank plans to license THAI to projects around the world.

Petrobank estimates are that it will cost USD20,000 per producing barrel to put a project together, whereas the average SAGD (steam assisted gravity drainage) project is USD60,000 per producing barrel. Including an upgrader puts you in the USD80,000 to USD100,000 per producing barrel. And because the oil is upgraded in situ, you’re producing 20- to 21-degree oil on the API scale rather than 9- or 10-degree oil.

THAI has the potential to solve the economics of heavy oil extraction in a relatively environmentally friendly way.

Between OptimISM and PessimISM

The Institute for Supply Management’s (ISM) factory index rose to 55.7 in October, reaching a three-year high and blowing away the consensus forecast. The report triggered a sharp but short rally yesterday as investors temporarily danced to this “beat.”

If you look a little deeper, however, a little of the luster comes off the report: The regional surveys don’t support the national, headline-grabbing number. Seven regions were down, while only two were up.

The ISM employment index also took a huge leap, to 53.1 in October from 46.9 in September. This ties July 2008 for the largest increase ever; July 2008 was also the last time we were above 50 on this index. Nonfarm payrolls declined by 128,000 during that month. The consensus expectation for October nonfarm payrolls right now is a decline of 175,000 following September’s loss of 263,000 jobs. It’ll be interesting to see whether Wednesday’s ADP private nonfarm payroll report confirms that employment is finally firming up, even more interesting to see what happens with Friday’s official Labor Dept statistics.

The ISM employment measure doesn’t actually “count” jobs–it’s a sentiment gauge, and so this surprising jump is also somewhat misleading. Consumers remain less optimistic about the state of the job market; a measure of confidence in the consumer job market was the worst it’s been in four months. At some point confidence will have to trickle down from managers to workers. The consumer accounts for 70 percent of GDP compared to 10 percent for the business sector.

Ahead of the Fed

The US Federal Reserve Open Market Committee begins its two-day meeting today; Fed watchers will be looking from subtle changes in language that may indicate when the central bank will begin reigning in its extraordinary efforts to support the economy.

A couple interesting factoids/coincidences are worth noting ahead of Wednesday’s interest rate statement. The Reserve Bank of India bought 200 tons of gold from the International Monetary Fund (IMF), about half of all the gold the IMF announced it would sell in September. This increases India’s gold holdings by 55 percent and further diversifies its reserves.

And the Reserve Bank of Australia (RBA), expectedly this time, raised its target interest rate by another 25 basis points to 3.5 percent, continuing to “gradually lessen the degree of monetary stimulus” now that the “risk of serious economic contraction has passed.” Monetary (and fiscal) authorities acted in concert as the crisis deepened, but it appears they’ll be acting on their own as we progress into “the new normal.”

Australia is an exceptional case; fiscal authorities there unleashed impressive spending efforts to stimulate the economy, and the country benefits tremendously from its proximity to China. For comparison sake, only 3 percent of Canadian exports go to China, while 75 percent head south to the US. Australia sends 24 percent of its exports to China, while only 6 percent head to the US.

Today’s Picture

Here’s a fascinating picture of the changing composition of that which backs the US dollar. You have to look hard at the extreme right side to see the radical change the Fed hath wrought with its efforts to prop up the economy. The bottom line according to the artist/analyst who created the graphic, John Paul Koning:

For the first time since WWI, Fed discounts, loans, and advances account for the largest component of assets backing the dollar. But in 2009, these loans include a host of emergency facilities created to deal with the credit crisis such as TAF, loans to fund the bankrupt assets of Bear Stearns and AIG, and more. Some of these loans are collateralized by risky and often undefined assets. Government debt as a proportion of all assets has fallen to its lowest level since World War II, while Agency debt and mortgage-backed securities have expanded their presence on the Fed’s balance sheet. The quality of your dollar’s back, it would seem, has become much harder to evaluate.

The Roundup

Earnings season is underway for Canadian Edge Portfolio holdings. Below is a recap of two more that have reported since last week; Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), formerly Great Lakes Hydro Income Fund, and Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) are scheduled to release numbers following the close of the market today.

We’ll provide more commentary in the November CE, which will be available Friday, November 6, and in coming issues of MLM.

Conservative Holdings

Consumers’ Waterheater Income Fund’s (TSX: CWI-U, OTC: CSUWF) third quarter earnings report was a mixed bag. The waterheater rental business experienced a 2.2 percent attrition rate under the pressure of increased competition from companies going door-to-door in its operating territories. A renewed marketing effort showed that attrition rates in August and September were lower than in June and July.

Total revenue was CAD46.1 million, an increase of CAD0.7 million compared to the same period last year. Rentals revenues declined slightly due to the impact of attrition, offset somewhat by higher rental rates. Sub-metering revenue was CAD2.3 million, of which CAD1.6 million was commodity charges billed to customers at cost. Sub-metering revenues included two months of operations in 2008. Distributable cash declined 28.4 percent to CAD12.4 from CAD17.3 million.

The decrease was due to CAD3 million in higher cash interest expenses after refinancing and higher cost of sales and general and administrative expenses of CAD2.4 million. The payout ratio came down from the second quarter’s 116.9 percent to 107.4 percent, the result of distribution cut that took effect with September’s payment, but was up from 92.1 percent a year ago.

Regarding the Stratacon sub-metering business, Consumers’ has developed a program to attain the consent of tenants to install the new devices. This effort will increase upfront costs to Consumers’; the process of integrating Stratacon won’t be simple. The Ontario Energy Board (OEB) instituted the new consent requirements in lieu of government legislation that would take too long to implement to adequately address consumer concerns.

The OEB’s order requires Stratacon and others operating in similar fashion to disclose to tenants “the financial, energy efficiency and environmental implications” of the sub-metering program. This will involve additional administrative burdens for Stratacon. The consent of 84 percent of landlords has been given, but the company needs to get the consent from tenants, a more difficult task. Consumers’ Waterheater Income Fund is a hold.

Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) reported that, accounting for the impact of one-time third quarter 2008 gains, overall net operating income (NOI) increased 36 percent over year-ago totals. NOI for the period was CAD92 million, up from CAD77 million in the third quarter of 2008.

The oil sands and heavy oil business saw increases in both third quarter and year-to-date NOI, while the Horizon Pipeline delivered as promised and the conventional business–where Pembina was able to reduce operating expenses–provided a steady foundation. The recently acquired Cutbank gas gathering and processing complex generated new revenue.

These factors offset a 10 percent decline in throughput in Pembina’s conventional pipelines; as CEO Bob Michaleski noted during a conference call to discuss results, “While the majority of Pembina’s businesses have relatively low commodity price exposure, our conventional pipelines are sensitive to production declines.” During the past year producers have scaled back efforts because of the new Alberta royalty regime, lower commodity prices and the credit crunch. Michaleski expects production rates to increase over the next year, thus creating more demand for Pembina’s conventional business. He also noted that the Nipisi and Mitsue pipelines are thus far on budget and on schedule to become operational in mid-2011.

Pembina recently completed a maintenance shutdown at Cutbank ahead of schedule and under budget, holding the concomitant October production decline to just 10 percent and sustaining revenue levels.

Michaleski reiterated that Pembina will convert to a corporation in 2010 and that he expects the company will maintain its current CAD1.56 per unit dividend “through 2013.” Rock-solid Pembina Pipeline Income Fund is a buy up to USD16.

Here are tentative earnings announcement dates for CE Portfolio recommendations, followed by the Roundup of news from How They Rate companies.

Conservative Holdings

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–November 5
• Artis REIT (TSX: AX-U, OTC: ARESF)–November 11
• Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF)–November 10
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–November 10
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–November 11
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–November 3
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–November 13
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–November 5*
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–November 5*
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–November 6
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–November 3
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–November 4
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–November 12
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–November 5

*Bloomberg estimate

Aggressive Holdings

• Ag Growth International (TSX: AFN, OTC: AGGZF)–November 12
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–November 16
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–November 11
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–November 5*
• Enerplus Resources (TSX: ERF-U, NYSE: ERF)–November 13
• Newalta (TSX: NAL, OTC: NWLTF)–November 5
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–November 10
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–November 5
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–November 4*
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–November 12
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–November 4
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–November 9

*Bloomberg estimate

Oil and Gas

Progress Energy Resources’ (TSX: PRQ, OTC: PRQNF) year-over-year comparables reflect the steep decline in natural gas prices that continues. Progress–which produces 87 percent gas, 6 percent oil and 7 percent natural gas liquids–realized an average natural gas price of CAD3.10 per thousand cubic feet, down from CAD9.12 a year ago. Revenue was off 55 percent.

Progress’ production for the third quarter averaged 30,122 barrels of oil equivalent per day (boe/d), 157,522 mcf per day of natural gas, 1,874 barrels per day of crude oil and 1,995 barrels per day of natural gas liquids. Production was 22 percent higher than the same period in 2008 because of the production acquired through the ProEx deal of Jan. 15, 2009.

Progress also reported across-the-board increases in expenses. Operating expenses increased 38 percent, transportation expenses 99 percent, general and administrative expenses 44 percent, and interest and financing expenses 3 percent–all a result of the ProEx acquisition. Royalties decreased 82 percent due to lower commodity prices. The company’s average royalty rate for the quarter was 9.5 percent compared to 23.7 percent in 2008.

Progress also noted progress in its Montney shale efforts. Three wells generated a total stabilized rate of 13.3 million cubic feet of gas per day. GLJ Petroleum Consultants Ltd estimates the discovered petroleum initially in place (DPIIP) around Progress’ current drilling activity in the Montney at 1.7 trillion cubic feet.

Management noted that gas prices continued to fall throughout the third quarter but had risen off their lows. Despite the fact that natural gas in storage is at historical highs, Progress anticipates a resumption of normal economic activity and favorable winter weather conditions will provide tailwinds for gas prices. The combination of a significant drop in drilling activity over the past couple years and a recovering economy  suggests to Progress management that supply and demand will come back into balance heading into the winter. Progress Energy Resources is a hold.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX), continuing an effort announced in August to divest non-core upstream assets, is selling oil and natural gas properties in the Lloydminster area around the Saskatchewan and Alberta border, and in Provost, Alberta, for CAD87 million.

Production from the assets during the third quarter of 2009 was 2,200 barrels of oil equivalent per day (boe/d), approximately 1,500 boe/d of heavy oil in the Lloydminster area and 700 boe/d of light and medium oil in the Provost area. Proved plus probable reserves were 4.4 million boe at June 30, 2009. The purchase reflects transaction metrics of CAD39,545 per flowing boe/d and CAD19.77 per boe of proved plus probable reserves. Provident Energy Trust is a buy up to USD6.

True Energy Trust (TSX: TUI-U, OTC: TUIJF) and Bellatrix Exploration Ltd have completed a plan of arrangement via which True has converted from trust to corporation. Holders of True units will receive an equal number of common shares of Bellatrix.

Within a few days of the Toronto Stock Exchange receiving all required documentation, True units will be de-listed. Concurrently, the common shares of Bellatrix Exploration Ltd will be listed on the TSX under the symbol BXE. Sell True Energy Trust.

Electric Power

Algonquin Power Income Fund is now Algonquin Power & Utilities Corp following completion of its plan arrangement and exchange offers with Hydrogenics Corp. The stock is trading on the Toronto Stock Exchange under the symbol AQN.

Primary Energy Recycling (TSX: PRI-U, OTC: PENGF) is benefitting from the budding economic recovery and corresponding conditions in the steel industry–US steel producers are operating at slightly over 60 percent capacity versus a capacity of less than 40 percent earlier in 2009–as well as the breathing room a new USD105 million credit facility should provide.

The company reported third quarter revenue of USD14.4 million, a year-over-year decline of 7.4 percent, and operating income of USD1.3 million, up slightly from USD1.2 million a year ago. Operating and maintenance expense was reduced by 15.3 percent, while general and administrative expenses fell 26.8 percent. Primary Energy Recycling, no longer paying a dividend as a corporation, is a sell.

Business Trusts

Norbord (TSX: NBD, OTC: NBDFF) reported a loss of CAD7 million (CAD0.16 per share) in the third quarter, a dramatic improvement over the losses of CAD18 million (CAD0.42 per share) in the second quarter of 2009 and CAD18 million (CAD1.21 per share) in the third quarter of 2008.

Norbord recorded positive earnings before interest, taxes, depreciation and amortization (EBITDA) of CAD10 million compared to losses of CAD2 million the second quarter and CAD9 million in the same period last year. Both North American and European operations generated positive EBITDA.

CEO Barrie Shineton noted that he expects unemployment and tightening credit to continue to weigh on housing markets in North American and Europe and therefore wood panel demand. “We expect it will take six to 12 months for these trends to reverse and meaningful improvement to occur in new home construction,” he said in a release announcing numbers. Norbord is a hold.

Real Estate Trusts

Lanesborough REIT (TSX: LRT-U, OTC: LRTUF) is selling another property in its effort to pay down debt and free up working capital, this time an 183-suite apartment complex in British Columbia for CAD13.8 million.

Lanesborough is providing an 18-month second mortgage of CAD6.5 million at an interest rate of 3 percent for the first six months and 6 percent for the remainder of the term. Net of the mortgage, the REIT will realize CAD2 million in cash. Lanesborough bought the property for CAD10.9 million in April 2004. Sell Lanesborough REIT.

Natural Resources

Cameco (TSX: CCO, NYSE: CCJ) reported a third quarter profit, excluding one-time items of CAD104 million (CAD0.26 per share). Costs of product and services sold continued to rise because of Cameco’s increasing presence in the spot market. CEO Jerry Grandey has stepped up purchases of uranium for trading purposes this year.

Sales fell 4.8 percent to CAD694 million. Uranium sales fell 15 percent from 9.8 million pounds to 8.3 million. Cameco sold uranium at an average price of CAD34.24 a pound in the third quarter, down from CAD37.88 a year earlier. Cameco is a buy up to USD30.

Canfor Pulp Income Fund’s (TSX: CFX-U, OTC: CFPUF) third quarter numbers were driven by demand for pulp from China.

Chemical pulp shipments to China rose 79 percent during the first nine months of the year compared to a drop of 14 percent in shipments to both Western Europe and North America. Prices for long-fiber northern bleached softwood kraft pulp rose from USD630 in April to USD660 June to USD770 in September. Announced prices for October of USD800 and for November of USD830 suggest Canfor will enjoy a strong fourth quarter as well.

Canfor reported net income of CAD8.5 million (CAD0.24 per unit), up from CAD5.2 million (CAD0.15 per unit) a year ago. Canfor Pulp LP, of which the fund owns 49.8 percent, reported distributable cash of CAD42.9 million, up from CAD23.8 million a year ago. Sales were CAD202 million in the quarter compared to CAD215.4 million for the same period last year.

The fund plans to convert to a trust when new taxation rules take effect in about 14 months, neither a moment before nor after. “At this time our view has not changed, and absent of any developments, we would expect to convert to a corporation on January 1, 2011, the date that the tax changes come into effect,” said CEO Paul Richards. After making four cuts to its distribution when demand for its pulp was weak, Canfor Pulp Income Fund remains a sell.

Teck Resources (TSX: TCK-B, NYSE: TCK) reported third quarter revenue of CAD2.1 billion. Net earnings were CAD609 million, up from CAD424 million a year ago.

Teck paid down USD5.1 billion on a bridge loan and reduced USD4 billion of term debt to USD2.7 billion, getting out from under much of the burden of its USD14 billion acquisition of Fording Canadian Coal Trust. The company won’t make any more asset sales to cope with the debt, and may in fact be looking to make acquisitions. Teck Resources is a buy up to USD25.

Energy Services

Mullen Group (TSX: MTL, OTC: MLLGF) reported a 35 percent year-over-year revenue decline, to CAD229.7 million from CAD352.2 million a year ago. On a sequential basis, however, revenue increased from CAD202.7 million.

Operating income for the quarter was off by 38 percent to CAD45.9 million. Mullen generated funds from operations of CAD36.5 million down from CAD67.4 million a year ago.

The trucking/logistics segment suffered because of the slowing economy, while Mullen’s oilfield services operations weakened along with the collapse in oil and gas drilling activity in Western Canada. Top-line growth of 10 percent on a sequential basis is one reason to buy Mullen Group up to USD15.

Energy Infrastructure

Enbridge Income Fund (TSX: ENF-U, OTC: EBGUF) reported third quarter distributable cash of CAD22 million, essentially flat with the CAD22.2 million generated a year ago. Revenue increased from CAD72.2 million to CAD79.4 million on throughput increases across most of the fund’s pipeline systems and rising output from its Green Power unit.

A CAD120 million expansion of its Saskatchewan system is forecast to add 125,000 barrels per day of capacity and to add significant cash flow. The company is focusing on other organic growth opportunities right now to support continued distribution growth.

Enbridge will announce conversion plans during its annual meeting in May 2010. Enbridge Income Fund is a buy up to USD12.

Financial Services

CI Financial (TSX: CIX, OTC: CIFAF) reported net sales of CAD191 million for October. Assets under management as of Oct. 31, 2009, were CAD63.7 billion and total fee-earning assets were CAD92.3 billion. Retail assets under management increased 0.8 percent from September to October. CI Financial remains a hold.