Even the strongest Canadian oil and gas producer trusts have taken on water lately. At the root of the selling is the same worry that’s taken down virtually everything except utilities and some of the strongest nonenergy trusts: recession worries.

Slowing economies typically mean less demand for energy. As a result, fear No. 1 is that oil prices will come off their highs in the $95 area, possibly falling back into the $60-per-barrel area. Already deeply depressed natural gas prices would presumably also take a further whack.

Recession fears have also revived the worries that Canadian firms—including trusts—would face a credit crunch, further limiting their ability to grow and even pay their bills. That’s despite pretty clear evidence Canadian banks have avoided the woes of their US counterparts in the mortgage market and that trusts are having no troubles with credit lines.

Worries about falling energy prices and slower Canadian growth have also taken down the Canadian dollar back to just slightly above par with the US dollar. That’s depressed the US dollar value of trusts in the past couple weeks from the levels reached earlier this month.

Finally, there’s tax-loss selling. As I pointed out in the November issue of Canadian Edge, the high-quality trusts in the Canadian Edge portfolios have fared generally well in the past year, particularly in US dollar terms. This month, however, everything has again come under pressure. Some of the selling has been profit taking. But the further prices decline now, the more likely we’ll see continued selling related to taxes, which, in turn, could send prices down further.

Admittedly, this is a fairly gloomy near-term picture. On the other hand, it has little to do with the long-run value of high-quality Canadian trusts.

Rather, the key is how they’re doing as businesses and whether they’re going to be able to keep up distributions. As long as that’s the case, today’s trials and tribulations in what’s become an extremely volatile, fear-driven market will be worth riding out. And even the scariest red ink we’re seeing spilled now will quickly change to black.

It’s easy to speculate about what may happen, and doomsday scenarios easily come to mind in a down-trending market. But Canadian trusts are dividend-paying businesses. And it’s only through real results—namely earnings—that we get a true picture of what’s going on.

Earlier this month, I sent out two flash alerts detailing the third quarter results of Canadian Edge Portfolio recommendations. We’ve been highlighting non-Portfolio trusts in the weekly Maple Leaf Memo, which is archived on the Canadian Edge Web site.

We’ll have more on these results in the regular December issue of Canadian Edge, which will be e-mailed to you Friday, Dec. 6. But the gist is—with the exception of Boralex Power Income Fund (BPT.UN, BLXJF)—all our recommendations continue to cover their distributions with cash flow by a healthy margin.

Even Boralex’s shortfall was a result of a near-term factor–low water flows to its hydro plants–that’s likely to reverse quickly. Management continues to maintain its current level of distributions.

With the oil and gas producers, the ability to maintain distributions is closely connected to the price of oil and gas. However, as I’ve pointed out, third quarter payout ratios were maintained despite realized selling prices for oil that were USD20 to USD30 per barrel below black gold’s current levels.

Oil prices could fall USD20 to USD30 a barrel in a wicked US recession. Then again, maybe they wouldn’t, given the heightened demand from outside this country.

And in any case, even if they did, our trusts proved in the third quarter they’re able to hold payout ratios steady by selling oil at $60 to $70 a barrel. If oil prices only fall, say, USD20 a barrel in the next six months, they should actually be able to increase their realized selling prices and profit margins.

Those facts, of course, haven’t stopped investors from selling off energy trusts in recent weeks. And Provident Energy Trust’s (PVE.UN, NYSE: PVX) dip during the past couple of days has drawn particular attention from Canadian Edge readers.

The trust’s payout ratio did rise to 89 percent in the third quarter, in part because a large share issue to finance growth in the past year, low natural gas prices and the rising Canadian dollar. That, in turn, hurt the Canadian dollar value of oil and revenue from US operations. Its realized selling price for oil, however, was less than USD65 per barrel in the third quarter, some USD30 per barrel below current spot rates. Its realized gas price, meanwhile, was just USD4.95 per million cubic feet, and natural gas liquids—a light oil equivalent—were sold at an average price of just USD55.22 a barrel.

Those realized prices will almost surely increase in the fourth quarter and on into 2008 as hedges come off and new sales are made, even if oil and gas do retreat from current levels. Also, the trust should benefit from rising production, both in Canada and at its US unit BreitBurn Energy Partners.

Some of the selling in Provident seems to have coincided with an announcement clarifying the purchase of Triwest Energy in a mostly stock deal that will boost the trust’s presence in Saskatchewan. Investors typically sell an acquirer and buy a target. This deal was announced a month ago, but it’s possible some are only noticing now or have become worried the purchase won’t be as accretive as management maintains.

However, I suspect that, as is the case with other energy producing trusts, the selloff in Provident has little to do with actual results. Rather, it’s all about fear and investors’ (including Wall Street money managers) tendency to sell everything except the most-proven safe havens when the chips are down.

I’ve certainly never been one to try to convince any investor to go outside his or her comfort level. I’ll freely admit my own emotions are torn watching these things move so crazily every day. And I’m constantly scanning the wires for possible evidence that I’m dead wrong on this or that, at the least, I’m overlooking something.

I can’t guarantee these oil and gas producer trusts—which have already suffered greatly the past two years—won’t suffer some more. Just because it’s very dark out doesn’t mean it won’t get darker still before the dawn inevitably comes.

But again, the key with the trusts is distributions. As long as they’re maintained, there’s no reason to sell them, other than fear of the unknown. If we do see something real and known, I’ll get out. But until that happens, I intend to keep them in the Aggressive Portfolio.

As I’ve pointed out before, there are alternatives to the volatility and cyclical nature of oil and gas producer trusts. And I don’t know many that yield anywhere close to Conservative Portfolio trusts.

These trusts are also affected by the ups and downs of the market. And occasionally some of them stumble, as Boralex has. But they’re not cyclical, they’re not tied to energy prices, and—provided they keep running their businesses well—all are set to keep paying big distributions well past 2011, when corporate taxation is set to kick in.

Boralex certainly will if it gets the water flows it needs, whether oil is at USD100 or USD50. If you’re getting regular heartburn in this market, that’s where you want to focus.