The future of trusts

There will be some tough decisions to make. Which trusts will still exist after next year? Which will make a successful transition to corporate status? Which will become takeover targets? Which ones will leave investors in the lurch?

One of my main projects at present is to identify the trusts I believe will survive and prosper, either as corporations or in their current form, while maintaining their payouts at or near present levels after the tax takes effect. We have already recommended several of these in my Income Investor newsletter including Crescent Point Energy, Colabor Group (both now corporations), Brookfield Renewable Power Fund (previously Great Lake Hydro), and Pembina Pipelines.

We recently added a new name to that list, Daylight Resources Trust. It is a Calgary-based mid-size energy trust that has been out of favour for some time because of its heavy weighting to natural gas (about 70 per cent of total output). However, the recent rebound in gas prices plus the announcement of the pending acquisition of Highpine Oil & Gas has sparked renewed interest in the shares.

Daylight operates primarily in central and western Alberta in the Western Canadian Sedimentary Basin. Current daily production averages about 23,000 boe/d (barrels of oil equivalent per day) but that is expected to increase to about 38,000 boe/d as a result of the Highpine acquisition, which closed on Oct. 8. The production mix will be more evenly balanced with 58 per cent coming from gas and 42 per cent from oil.

Daylight pays monthly distributions of $0.08 per unit ($0.96 annualized) for a yield of 11 per cent based on the Oct. 9 closing price of $8.75.

I'm also looking for trusts that are expected to cut their distribution when the new tax comes in but will still offer attractive yields based on their current price and announced policies. A prime example of this type of fund is Yellow Pages Income Fund, which I analyzed in an August column when the shares were trading in the $5 range. The shares have moved up more than 10 per cent since, closing on Oct. 9 at $5.59. But even at the higher price, I think Yellow Pages has the potential to yield around 11 per cent after converting to a corporation. So there is still significant upside here.