Prime Minister Stephen Harper confirmed last week that his minority Conservative government will address issues regarding foreign acquisitions of Canadian assets involving state-owned enterprises but also said the proposed takeover of PrimeWest Energy Trust by the Abu Dhabi National Energy Co, or TAQA, would be reviewed under existing rules, as set out in the Investment Canada Act.

As part of its look at the Investment Canada Act, Harper told reporters that Canada will look to ensure there’s a national security clause as part of its foreign investment review practice. He was adamant that any reforms would not “feed protectionist sentiment.”

Industry Minister Jim Prentice will establish guidelines for acquisitions by state-owned companies, including an explicit test to determine whether a takeover is detrimental to national security. Prentice said the government already has the power under the Investment Canada Act to take into account issues of state ownership and governance when reviewing a foreign takeover but noted that Canada was the only major industrialized nation not to have an explicit national security test when reviewing foreign takeovers.

In the wake of the income trust tax, new climate change legislation and Alberta’s consideration of increased royalty rates, the oil and gas sector responded with alarm to Prentice’s initial statements on Ottawa’s review of the TAQA deal. The perceived threat to the PrimeWest/TAQA deal was understood initially as one more drag on share prices.

Prentice later reiterated that the government was eager to attract foreign investment to Canada, including that of foreign state-owned companies that operate transparently and according to market principles. Harper’s statement further eased concerns.

TAQA has said it plans to spend USD20 billion in Canada, but that’s just a fraction of the total amount of petrodollars floating around. McKinsey & Co reported last week that there’s about USD3.8 trillion in petrodollars looking for an investment home; that figure could reach USD5.9 trillion by 2012.

Given the amount of capital to be potentially deployed, Harper and Prentice had to make TAQA and its peers feel welcome in Canada.

Rope-a-Dope

The interests of Canada’s Liberal Party and the sentiment of Canadian citizens toward the prospect of voting happen to align right now. Neither group wants a federal election any time soon.

But is Liberal Party Leader Stephane Dion actually getting ready to bait Harper into revealing his majority lust? Rope-a-dope is a boxing style used most famously by Muhammad Ali (who coined the term) in the 1974 Rumble in the Jungle against George Foreman. The idea is for the boxer to lie on the ropes, conserving energy and allowing the opponent to strike him repeatedly in hopes of making him tire and open up weaknesses to exploit for an eventual counterattack.

It worked for Ali against Foreman, but the strategy had a bumpy test run in his first fight against Joe Frazier in 1971. Ali took a lot of heavy blows in the Fight of the Century, and many sweet scientists suspect that was the beginning of the long-term damage to Ali that’s now so obvious.

It’s not recommended widely in the boxing world because unless you have incredible defensive skills and can take a punch, you risk serious long-term damage. In the eyes of many observers of Canadian politics, Dion is already on the ropes, so this may be a tactic borne of necessity rather than cunning.

Harper has proclaimed loudly and often that he’ll no longer tolerate “obstruction” by the opposition parties, suggesting he’ll consider major pieces of legislation to be matters of confidence, meaning the government will fall if such bills don’t pass.

Dion brought in a new top advisor last week, luring Johanne Senecal away from her role as vice president of public affairs for Bell Canada; before jumping to the private sector, Senecal put in 20 years of political service. She capped the run with time as special policy advisor for Quebec to Prime Minister Jean Chretien.

Dion is weighing a strategy supported by Senecal to confront Harper one piece of legislation at a time rather than defeating the minority government on the Oct. 16 throne speech. The Liberal leader and his advisors are hoping Harper pushes too hard at a time when Canadians are satisfied with a minority government.

Dion has held ground through most of Canada. He’s weak, as the Liberals were in February 2006, in Quebec. The residue of the sponsorship scandal tainted the Kool-Aid the Grits pitched to Canada’s ardently independent province, and Harper’s conservative and Duceppe’s separatist flavors drew away enough Liberal support to grease Harper’s way to a minority government.

Former Prime Minister Pierre Trudeau and Jean Chretien established the Liberals as the party federalist alternative, but separtist sentiment has waned in Quebec. The Action democratique du Quebec, which advocates greater autonomy but not actual separation from Canada, has made a strong showing in recent local elections.

Stringing Harper along–forcing him to basically stand up and argue for more power than Canadian voters seem to be willing to grant–also allows Dion time to work on repairing his and his party’s image in Quebec. That’s what he brought Senecal in to accomplish.

Canadian voters aren’t in a mood to give out mandates, but Harper is intent on governing as if he had majority support. Dion will let him in an effort to expose his autocratic tendencies. Canadian trusts represent the best opportunities for yield-seeking investors for at least the duration of the three-year tax holiday.

There’s still money to be made amid the status quo. But a Dion-led Liberal victory would strengthen the possibility of changes being made to the income trust tax law.

Let’s hope this plays out more like the Rumble in the Jungle than the Fight of the Century.  

Something for Something

It’s widely reported in the Canadian press that Mark Carney, the No. 3 official in the federal Finance Dept, is the guy behind Jim Flaherty’s move to tax income trusts at the entity level.

Last week, Flaherty nominated Carney, 42, a former Goldman Sachs investment banker, to succeed David Dodge as governor of the Bank of Canada.

Said David Akin of CTV, “Mark Carney is also the guy who had been driving a couple of key files for the government, including the income trust file. That was Mark Carney’s baby. For those who agreed or disagreed about income trusts: Blame Mark Carney as one of the bureaucrats who had his fingers all over that one.”

Looks like he got his reward.

The Roundup

News on trusts is light this week, but that will soon change as we enter the heart of third quarter earnings reporting season.

Look for breakdowns of the numbers for CE Portfolio recommendations in the weeks ahead.

Oil & Gas

Canadian Oil Sands Trust (COS.UN, COSWF) reported Oct. 1 that production from Syncrude’s Coker 8-3 was interrupted the previous day because of “an operational upset.” The duration of the outage could be about three weeks.

Syncrude has begun to ramp up production on Coker 8-2 and may also increase rates on Coker 8-1 to mitigate the production shortfall. Syncrude’s productive capacity is currently reduced by about 70,000 barrels per day (bpd).

Canadian Oil Sands owns a 36.7 percent working interest in the Syncrude joint venture. Canadian Oil Sands Trust is a buy up to USD33.

Harvest Energy Trust (HTE.UN, NYSE: HTE) has moved up scheduled maintenance at its Come-By-Chance refinery in Newfoundland by about five months, a move that will cut fourth quarter output. Output at the plant will average 73,000 bpd in the fourth quarter because of the five-week turnaround at the plant’s crude unit starting later this month. Current capacity is 115,000 bpd.

Harvest has already begun work on a catalyst change-out at the refinery. The turnaround had been scheduled for the second quarter of 2008. Hold Harvest Energy Trust.

Gas/Propane

Eveready Income Fund (EIS.UN, EISFF) has won five long-term oil sands service contracts with, respectively, Suncor Energy, Nexen, Canadian Natural Resources, Petro Canada and Syncrude. The contracts range in length from two to five years and will utilize Eveready’s vacuum truck, high pressure water blasting, chemical cleaning, hydro-excavation, tank truck and steam cleaning services. Eveready expects to generate revenue of about CD400 million during the next three years.

Eveready has also acquired Wellco Energy Services Trust’s (WLL.UN, WLLUF) truck division, a fleet of 25 units consisting of vacuum trucks, hydro-excavation trucks, water trucks and support equipment for CD5 million in cash. Wellco said it will net CD4.3 million after expenses and certain liabilities related to the trucks.

Wellco is selling the assets as part of an ongoing assessment and review of its business. In May, the trust said it was negotiating a possible sale of the company, but nothing has developed from those talks. Eveready Income Fund and Wellco Energy Services Trust are both holds.

Natural Resources Trusts

SFK Pulp Fund (SFK.UN, SFKUF) has temporarily closed its Saint-Felicien mill sooner and longer than planned because of a mechanical problem. The company said a rupture of the pulp pre-retention tube in the bleaching system led it to close the mill two weeks before the scheduled semiannual shutdown.

Instead of the semiannual closure running from Oct. 14 to 20, SFK Pulp said the closure will be from Oct. 1 until Oct. 13, a week longer than scheduled. Repairing the breakage and the extended shutdown will increase SFK’s cost of sales for the fourth quarter by about CD1.7 million. SFK Pulp Fund is a hold.