Two "CanRoy" Investments for the Oil and Gas Boom

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By Keith Fitz-Gerald
Contributing Editor

Many investors are convinced that it takes sophisticated investment strategies to rack up big returns.

That's just flat out wrong.

In fact, the simplest strategies are often the best, and can produce major returns – especially if you align yourself with powerful global trends, such as energy.

Among the best examples of this overall approach that I've seen lately are the Canadian Royalty Trusts, or "CanRoys" for short.

These particular investments kick off a nice monthly income, and can offer some alluring tax-sheltering benefits. And those are just gravy. The main course is the huge upside returns that each of these trusts can generate over the next few years.

In Canada We Trust

In case you're not familiar with the CanRoys, here's how they work. In one respect, the CanRoys are essentially gas-and-oil companies structured as open-ended trusts. Because they are set up as trusts instead of corporations, there is no taxation at the corporate level, which means that they can – and often do – pay out gobs of cash to their unit holders. Yields of 10% to 20% are not uncommon.

Many so-called investment "experts" seem to think that the CanRoys are all but done, given the Canadian government's recent decision to tax trusts at the corporate level beginning in 2011. But I disagree.

In fact, I believe the CanRoys will continue to outperform other energy-related investments for the next 12 months or more for two very important reasons:

  1. First, because of a concept known as "currency translation," the more the U.S. dollar declines versus its Canadian counterpart, the more valuable the CanRoys-generated income becomes. In other words, the higher the Canadian dollar rises, the more greenbacks each one can buy when the Canadian currency is translated back into U.S. dollars. Over time, this can really add up – especially when the dollar has plunged to historic lows against the Canadian Loonie, and is likely to fall further still.
  2. Second, because the newly emergent (and increasingly wealthy) China and Middle East economies are awash with cash, they going on a global shopping spree. Not only are the CanRoys alluring investment opportunities for some of that capital, they may also be takeover targets as the Abu Dhabi National Energy Co.'s proposed $5 billion buyout of the PrimeWest Energy Trust (PWI) recently demonstrated.

Now for the inevitable caveat: Not all trusts are the same.

We want to stick with those trusts that have deep reserves and proven management. As we near 2011, and the tax laws begin to change, many trusts will either cease operations altogether, or will start funneling previously distributable earnings into new property acquisitions – which will lower their effective payout yields.

Moreover, the trusts that lack both experienced management and the needed major reserves will find themselves crippled, and will see their valuations plummet like a stone.

However, the trusts that I favor – those that are well positioned and well run – should receive a nice tailwind as the industry consolidates.

Among the many trusts that I follow are two of my longtime favorites – the "Dynamic Duo" of Canadian Energy Trusts:

  • Enerplus Resources Fund (ERF), which recently yielded 11.05%.
  • And Canetic Resources Trust (CNE), which recently yielded 14.72%.

Enerplus is one of the oldest and best run trusts available to investors today. It not only possesses very experienced management, it also has deep reserves and a solid grasp on what it will take to grow over the next few years.

Similarly, Canetic is a trust with experienced management and a reserve pool that's much deeper than most trusts. Plus, they're on the hunt, having recently acquired Titan Exploration, which helps consolidate their hold on the strategic and energy-rich southwest Saskatchewan region.

There are loads of trusts to choose from, but now that oil is trading above $90 a barrel and the dollar is so weak, I can't think of a single good reason to exclude either of these two great trusts from your investment portfolio.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He’s a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean.

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