Dividend sustainability is ultimately what drives Canadian trust prices. That’s hard to keep in mind today, as virtually everything is being sold hard and fast.

As I wrote in the October issue of Canadian Edge–e-mailed to you last Friday–energy trusts are the most vulnerable group to the turmoil in the financial sector. That’s because energy prices are so heavily impacted by economic growth, which the banking crisis is now expected to severely impair well into 2009.

Indiscriminate selling, however, always leads to dramatic pricing anomalies, and opportunities. And after today’s selling, prices of the five “core” trusts profiled in the October Feature Article are back to levels they held at $50 oil. That’s still a long way from where we are now—pricing in a lot of downside that hasn’t happened yet.

To paraphrase the legendary trader Jesse Livermore, markets can be irrational a lot longer than investors can be solvent. Dividends, however, are still the most important part of returns on trusts. And as long as trusts’ underlying businesses are sustainable, their distributions will be as well.

Without a doubt, the market is treating our trusts universally shabbily today, as it has for the past few weeks. But the key to coming out of this is still dividends, and they depend on standing up to the stress tests that underlie the bear market: tough credit conditions, the weakening US economy (and its impact on energy prices for trusts) and rising production/operating costs.

The Feature Article attempted to lay out the parameters for energy producing trust dividend sustainability. In brief, they’re realized prices for energy sold, operating costs, reserve quality, debt and how much cash they’ve used this year to boost dividends, as opposed to doing things to improve sustainability such as cutting debt and investing in development.

Below, I present a table of raw research that addresses these questions for each of the producer trusts covered in How They Rate. The events of the past month or so may change some of these figures as we discover third quarter earnings in the coming weeks. So far, however, the prognosis is still pretty solid, particularly for the trusts we own.

That’s of course wildly at odds with how the market has treated the trusts recently. But unless the numbers deteriorate, the upshot is these trusts can still afford to pay outsized distributions.

One hopeful anecdotal sign actually came today with one of our more leveraged plays: Advantage Energy Trust (TSX: AVN-U, NYSE: AAV). The shares have been pounded today, as is the case with all producer trusts and particularly those more leveraged to natural gas like Advantage. But the company announced a 25 percent increase in its capital spending for the rest of the year, to be used developing its promising Montney and Glacier properties. That’s the sign of a management that remains optimistic about its business, as well as a trust with still few problems accessing capital or generating sufficient cash.

Only time will tell how this market shakes out or how much more these trusts will be sold off. And, given the depth of this global financial turmoil, I don’t think anyone can completely rule out such a collapse in oil to $50 or even lower. But at the very least, Advantage’s move is a sign that our favorite oil and gas producer trusts aren’t melting down as businesses. And again, that’s ultimately the key to their recovery.

As long-time readers know, I’m no fan of averaging down in any market. Too often it’s a strategy that invites the kind of emotion that makes a rational decision to sell later all but impossible. But some incremental investing in strong trusts now–particularly those highlighted in the October CE–is likely to be one of the best moves anyone will make this year.

Source: Bloomberg, Canadian Edge