Much of the selling in the futures market was based on panic, exactly like that which gripped investors ran from equities and any other instrument that connoted any sort of risk whatsoever. Nevertheless, despite the long-term structural argument in favor of higher prices, crude cratered; operators in the sands cut back spending plans for 2009 and adjusted project schedules to account for new methods of financing.

Many projects were cancelled outright, while others were simply delayed. No wonder: Producing oil from the sands is expensive in terms of operating costs–about USD35 per barrel. Obviously, oil has to stay above a certain level consistently and predictably for sands production to be economic.

But here in early 2010 several factors suggest we’ve entered a “new normal” for oil prices, a neighborhood above USD60 per barrel. One of the clear outcomes of the Great Recession is that the global demand profile has changed; emerging economies, led by China and India, will burn more and more fossil fuels as their consumers, too, feed the desires that come with rising incomes.

On the supply side, easy-to-access, easy-to-produce–and therefore cheap–reserves are depleting rapidly. Failure to prepare leaves the oil-intensive US economy, in particular, vulnerable to future supply and price shocks that create short-term profits for producers but long-term turmoil for the broader economy. Unconventional sources are of greater and greater strategic importance, and the vast Canadian oil sands–at 172 billion barrels second only to Saudi Arabia in terms of estimated reserves–are located right next door to the world’s biggest oil consumer.

In addition, although still high compared to conventional production, oil sands operating costs have come down from 2006 levels. And costs of credit have also come down significantly from late 2008, early 2009 levels. Companies are planning now to meet anticipated demand as the global economic recovery takes hold.

Producers are only slowly acknowledging plans to boost spending in oil sands assets. But if oil stays above USD60 through 2010–and this is as close to lead-pipe certainty as you’ll get in the market these days assuming we’re not headed for the increasingly unlikely (and historically anomalous) double-dip recession–look for Suncor Energy (TSX: SU, NYSE: SU) to kick-start the ambitious Fort Hills project it owns by virtue of its August 2009 acquisition of Petro-Canada.

Our favorite way to play the Canadian oil sands is through Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF), the pipeline operator with an exclusive contract to service the 360,000-barrels per day Syncrude project.  

Exhortation and Harmonization

The oil sands are fixed in the North American energy supply equation. It’s the source of 1.2 million barrels of crude per day, most of which is exported to the US. Extracting and processing bitumen from the sands is an energy-intensive process that requires both electricity and steam, which are usually generated by burning fossil fuels.

This energy intensity and related emissions–as well as the massive and ugly footprint oil sands operations leave on the natural landscape–have raised concerns about the management of the resource at the activist level, of course, but also now at the official level.

The Conservative government in Ottawa rightly understands the oil sands as a vitally important economic and strategic resource; no other country among the G-7 has a comparable asset.

In fact, Environment Minister Jim Prentice used almost those exact words in recent talk in Alberta: “The oil sands is an important strategic resource,” noted Canadian Environment Minister Jim Prentice to a group of reporters following his appearance at the University of Calgary’s School of Public Policy. “No other industrial democracy in the world has an asset that is similar to that and there certainly is no asset similar to that in the United States.”

That hasn’t stopped officials from essentially telling oil sands producers to clean up their act. “For those of you who doubt that the government of Canada lacks either the willingness or the authority to protect our national interests as a ‘clean energy superpower,’ think again,” said Prentice to a meeting of business leaders in Calgary. “We do and we will. And in our efforts we will expect and we will secure the co-operation of those private interests which are developing the oil sands. Consider it a responsibility that accompanies the right to develop these valuable Canadian resources.

“How we manage environmental issues post-Copenhagen will define Canada’s future and our reputation on the international stage.”

And as he exhorted the private sector to basically tell a better story Prentice provided real help by saying Canada wouldn’t adopt its own climate change legislation until the US passes a bill. This suggests any government approach to oil sands and emissions reductions will involve incentives for research and development as opposed to punitive levies.

In recent public remarks Prentice has repeatedly used the word “harmonization” to describe the Conservative government’s approach to the global warming issue. In fact, Canada submitted its carbon-emission-reduction goal on time and as politely requested by the Copenhagen Accord. With its commitment, our neighbors up north also announced their approach to climate change: “Canada’s emissions reduction target for 2020 will be aligned with the emissions target and base year of the United States.”

What this means functionally is still probably at least many months off, so Conservatives have extended the game; what it means symbolically is that Canada has committed to reducing carbon emissions 17 percent below 2005 levels by 2020, a downgrade–at least in the eyes of environmentalists–from the 20 percent from 2006 levels by 2020.

A US climate bill in 2010 will be a tough slog, one, most observers predict, Congressional Democrats will shy from rather than arm their Republican opponents with more “big government” ammo–on top of the health care stockpile–ahead of November’s midterm elections. In the budget presented Monday by President Obama, USD646 billion in revenue from a cap-and-trade system has been dropped, an indication of lack of confidence in Congress’ ability to pass a bill with such a system.

The wildcard here is the Environmental Protection Agency, which is on course to unilaterally impose CO₂ limits if Congress doesn’t act. This has prompted some swing Democrats in the Senate to re-think positions on cap-and-trade, and Republicans as well are thinking about striking deals. The choice here isn’t “doing nothing” and “doing something.” It’s “doing something” or having the EPA do it for them.

However the US politics shake out, the current Canadian government has sent a strong signal that oil sands production will be front-and-center in any consideration of federal and continent-wide energy policy.

Drill Down

Curious about the Canadian oil sands story? Join Roger Conrad in sunny San Diego, California, April 23-24 for the 2010 Wealth Society Member Summit. You’ll have a chance to sit down with Roger one-on-one to talk about where to find the best ideas to generate total returns as Canadian income trusts convert to high-yielding corporations and how to position your portfolio for the year ahead.

Join Roger and his colleagues GS Early, Elliott Gue, Yiannis Mostrous, and Benjamin Shepherd at the historic Hotel del Coronado–one of the top 10 resorts in the world according to USA Today, one of the top 20 hotel/spas in the world according to Travel + Leisure, and the No. 2 place in the world to get married, according to the Travel Channel.

And on April 23-24, Coronado Island will also be the best place in the world for relaxation and profit. We’re expecting 72 degrees, sun and fun. You may find all details at www.InvestingSummit.com.

Call 1-800-832-2330 (between 9:00 a.m. and 5:00 p.m. EST Monday through Friday) or go online now to reserve your seat at the table. Space is limited.

The Roundup

Finally, tomorrow marks the start of Canadian Edge Portfolio reporting season. Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) will kick it off with a post-close numbers release Wednesday and follow-up conference call on Thursday morning. Bell Aliant is one of the High Yield of the Month recommendations in the February CE, which will be published Friday afternoon, February 5.

Here’s the news of note from Portfolio companies, including tentative reporting dates, and highlights from around the How They Rate universe.

Conservative Holdings

Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) will acquire Innergex Renewable Energy (TSX: INE, OTC: INGXF) through a reverse takeover that will also result in the conversion of the income fund into a corporation. The combined entity will be one of the largest ndependent renewable power producers in Canada.
Unitholders of the income fund will receive 1.46 shares of the new company per current share of the income fund. The new entity will pay a distribution at an annualized rate of 58 cents Canadian, which will be sustainable past 2011 when trust taxation kicks in.

For Innergex Power Income Fund unitholders, that means an effective reduction in distributions from an annualized rate of CAD1 per share to CAD0.85 per share.

The combined Innergex will own 326 megawatts (MW) of installed capacity in operation. An additional 128 MW of renewable power is expected to come online within the next two years. Combined Innergex will generate 73 percent of its power from hydroelectric facilities, 27 percent from wind facilities. Innergex Power Income Fund is a buy up to USD12.

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–February 26
• Artis REIT (TSX: AX-U, OTC: ARESF)–March 16 (confirmed)
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)–March 29 (confirmed)
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–February 3 (confirmed)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–February 12
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–February 9 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–February 24 (confirmed)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–March 4
• Colabor Group (TSX: GCL, OTC: COLFF)–February 25
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–February 24
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–February 12
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–March 16
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–February 11 (confirmed)
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–February 18 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–March 2 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–March 17 (confirmed)
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–March 3
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–February 9 (confirmed)
• TransForce (TSX: TFI, OTF: TFIFF)–February 25 (confirmed)
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–February 12

Aggressive Holdings

• Ag Growth International (TSX: AG-U, OTC: AGGZF)–March 16
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–February 11
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–February 19
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–March 2 (confirmed)
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–February 26
• Newalta (TSX: NAL, OTC: NWLTF)–March 5
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–March 10
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–February 18
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–March 10 (confirmed)
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–March 11
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–February 26
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–February 12

Oil and Gas

Bellatrix Exploration (TSX: BXE, OTC: BLLXF) boosted its 2010 production forecast by 10 percent in anticipation of increased drilling activity. Management expects average daily production to be about 8,500 barrels of oil equivalent per day (boe/d).

Separately, Bellatrix announced the closing of a previously announced bought-deal financing; the company raised gross proceeds of CAD45 million through a new-share offering conducted through an underwriting syndicate. The syndicate exercised its full over-allotment option, resulting in the issuance of 13.6 million common shares at CAD3.30 per.

Net proceeds will be used to reduce amounts outstanding under existing credit facilities, allowing Bellatrix to room to borrow to fund its capital program and other corporate needs. Hold Bellatrix Exploration.

Gas/Propane

Superior Plus Corp (TSX: SPB, OTC: SUUIF) announced an increase to the amount available to it under its syndicated credit facility from CAD570 million to CAD600 million as well as changes to definitions related to financial covenant ratios.

The credit-facility increase, combined with funds to be raised through a CAD60 million bough-deal equity offering (scheduled to close February 10), would leave Superior with approximately CAD170 million of undrawn capacity under its credit facility. Superior Plus Corp is a buy up to USD14.

Business Trusts

Cinram International Income Fund (TSX: CRW-U, OTC: CRWFF) has received written notice from Warner Home Video to the effect that Warner has exercised its option to terminate its service agreements with Cinram on July 31, 2010. Warner accounted for 28 percent of Cinram revenue in 2009. Sell Cinram International Income Fund.

Norbord (TSX: NBD, OTC: NBDFF), still contending with an historically weak North American home construction market, reported a 2009 loss of CAD58 million (CAD1.35 per share), compared to a loss of CAD115 million (CAD7.62 per share) in 2008. The oriented strand board (OSB) maker recorded a loss of CAD11 million (CAD0.25 per share) in the fourth quarter, compared to a loss of CAD30 million (CAD1.88 per share) in the fourth quarter of 2008.

Cost-cutting and an improving European market offset lingering trouble in the US, where housing starts declined to 0.55 million in 2009 from 0.9 million in 2008, 1.35 million in 2007 and 1.8 million in 2006.

North American housing markets and OSB prices declined throughout the first half of 2009, reached a bottom mid-year, and began to trend up in the third and fourth quarters. Earnings before interest, taxation, depreciation and amortization quadrupled in Europe on rising demand and improved prices.

The company’s net debt-to-total capitalization ratio was 58 percent at the end of 2009. Hold Norbord.

Real Estate Trusts

H&R REIT (TSX: HR-U, OTC: HRREF) is issuing CAD230 million principal amount of senior unsecured debentures in two tranches. One tranche, totaling CAD115 million, will mature Feb. 3, 2015, and bear an interest rate of 5.196 percent. The other, also 115 million, will mature on Feb. 3, 2017, and bear an interest rate of 5.902 percent.

Net proceeds will be utilized to fund the repurchase of debenture issued via private placement with Fairfax Financial Holdings. Dominion Bond Rating Service has rated the new issue BBB (stable). Hold H&R REIT.

Energy Services

Peak Energy Services Trust (TSX: PES-U, OTC: PKGFF) is under review by the Toronto Stock Exchange for continued listing on Canada’s biggest board. The trust has 120 days to get back into compliance with listing requirements.

Separately, Peak is raising CAD16 million through a private placement of 80 million new units at CAD0.20 per and hopes to raise another CAD25 million via a new rights offering of units. Peak has also reached agreement with its senior lenders for amendments to Peak’s senior loan facilities. Hold Peak Energy Services Trust.