The two sides of energy are the focus of my High Yield of the Month picks. On the one hand is a long-time Portfolio holding from the most recession-resistant of industries, energy infrastructure. On the other is a rapidly growing upstart in the ultra-cyclical oil and gas producer sector.

What both have in common: high yields well protected by strong cash flows, solid balance sheets and skilled management teams. Those are strengths that will carry shareholders of both to powerful returns in the coming months and years.

In the conservative corner is Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF. As reported in the August Portfolio Update, Keyera had a sound quarter at all three of its major operating segments, despite the worst energy patch depression in decades for the energy companies that are its customers. The primary reason is sound assets backed by opportunistic management and a conservative financial strategy.

Gathering and processing (48.5 percent of earnings) is a risky business at many companies, but it’s something else entirely at Keyera. Facilities are situated almost entirely in regions focused on advanced horizontal drilling and earn cash flows tied to fees that fluctuate little with energy prices.

Management has been immensely successful in recent years at perceiving opportunities for tuck-in expansion of existing gathering and processing assets, low-risk additions that are almost always entirely contracted out before the first spade of earth is turned.

And it’s been able to anticipate the need for entirely new facilities as well, for example an ethane extraction unit started up this summer at an existing gas processing plant. All of the 5,000 barrels of ethane per day is sold to a major petrochemical customer under a long-term sales contract, so it’s been immediately accretive to cash flow.

Gathering and processing profits were up 10 percent in the second quarter over year-earlier levels. That was despite turnarounds, or maintenance shutdowns, at two facilities during the period and the steep decline in drilling in the face of lower gas prices. That reflects both the high quality of assets as well as the successful addition of new facilities, such as the acquisition of an additional 5 percent interest in the Strachan gas plant, now 91 percent owned by the trust.

Keyera has also built a valuable portfolio of natural gas liquids (NGL) infrastructure assets. This business (25 percent of earnings) grew earnings by 32 percent in the second quarter. That was in large part due to strong demand for storage and fractionation services, driven in part by the wide current differential between the price of oil and the equivalent of natural gas.

At the accepted ratio of 6-to-1, for example, gas is selling now at a barrel of oil equivalent price of barely USD16, or less than a quarter of black gold’s price. That makes liquids created from processing natural gas a profitable alternative to buying oil on the open market, or using oil to create those same refined products.

Keyera’s NGL assets include storage, fractionation and transportation facilities as well as terminals for other means of transportation. They’re centered in and connected to the Edmonton/Fort Saskatchewan energy hub, the heart of the energy patch and an ideal location for locating and developing new assets.

One example is a new storage cavern in Fort Saskatchewan slated to bring its first capacity into service in mid-2010, at which time it will begin generating solid fee-based income even as it’s systematically expanded.

Keyera’s third major division, energy marketing, is run as a perfect complement to the other two operations. The division helps the company to profitably manage its commodity and economic exposure by handling relationships with customers.

And it’s also invaluable for identifying new low risk opportunities to profitably build infrastructure. For example, the trust has perceived opportunities for NGLs in oil sands development, which continues to grow despite environmental concerns and volatile energy prices.

Marketing had a more difficult quarter than a year ago, as division earnings were roughly half last year’s record levels.

That to a large extent reflects the collapse in the overall energy market from its 2008 highs and resulting lower prices and volumes. But the division still managed solid return, thanks in large part to strong sales of butane.

The overall result was another immensely profitable quarter, with distributable cash flow covering the dividend by a margin of nearly 2-to-1.

That’s despite sizeable levels of capital spending, which management is making in the current weak environment as it “positions Keyera for natural gas and oil sands growth over the next several decades.”

That’s the kind of Buffett-like long-term perspective that can generate truly monster returns for those who patiently buy and hold, particularly with the yield of nearly 9 percent.

That dividend level will also hold after January 2011, when the trust plans to convert to a corporation.

Up 30 percent since the beginning of the year and at breakeven for the past 12 months–some of the most turbulent on record–Keyera Facilities Income Fund is a strong buy up to USD20, especially for those who don’t already own it.

At a time when other producers are pulling in their horns, Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) is on the verge of what’s potentially its most important expansion ever. In late August, management announced the takeover of Highpine Oil & Gas Ltd for total consideration of CAD530 million in cash and Daylight units.

If successful, the deal will add a wealth of high-cash-flow light oil properties, pushing Daylight’s total output up to 38,000 barrels per day (bbl/d) from a current level of a little over 23,000.

Management states the deal will immediately be “highly accretive” to per unit cash flow and production. It will re-balance Daylight’s output to roughly 58 percent natural gas and 42 percent oil and natural gas liquids. It will add undeveloped lands in Daylight’s core West Central and Elmworth regions, even as the combined trust will hold a strong position in the Pembina region.

When I initially added Daylight to the Portfolio in May 2008 I noted management’s strategy as smaller player of acquiring land in a wide range of areas, primarily in the Western Canadian Sedimentary Basin. What these properties have had in common is they’re near land held by at least one larger player, who is hard at work proving the value of what’s underground as well as demonstrating the technology needed to develop it.

This wait-and-watch strategy has enabled Daylight to acquire intelligence about its key properties without heavy capital spending or investing in what turn out to be dry holes.

It’s also been able to garner needed cash flow via an extensive “farm out” program, earning royalties in exchange for allowing others to develop its lands.

During the time I’ve held Daylight the shares haven’t been spared the ups and downs of the energy market.

The trust’s heavy exposure to natural gas production was a particularly big contributor to a halving of distributable cash flow per share from last year’s second quarter, as the trust received only about CAD3.50 per million British thermal units for its output after hedging.

That more than offset the positive effect of a combination of operating expense reductions, an 11 percent increase in production and a 41 percent reduction in bank debt.

In response to the weak environment, Daylight cut its distribution by 38.5 percent effective with the February 2009 payment. Its share price, meanwhile, is still off nearly 28 percent over the last 12 months, despite nearly doubling from early March. And the unit price is still less than half the all-time high reached in early 2006.

On the other hand, Daylight has fared immeasurably better than any other small, gas-weighted producer over that time, trust or corporation. And today, with a payout ratio of barely 50 percent of distributable cash flow (based on realized selling prices at or below the current forward curve for natural gas and oil) and net debt barely equal to annualized cash flow, it’s as well or better positioned than any rival to weather a further downturn in energy prices.

Ultimately, of course, the Highpine deal’s profitability depends very heavily on what happens to oil and natural gas prices in coming years.

The purchase brings Daylight its favorite food, undeveloped land with good geology and immense potential for further high cash flow production. But the 600-plus drilling locations at the post-deal trust will only be profitable to develop if gas prices recover.

The deal must also win approval from Highpine’s shareholders, though that’s likely given the benefits of the combination and the fact that officers and directors own 9.5 percent of that company.

Daylight is also protected by the CAD20 million breakup fee it will be owed if approval is not forthcoming. A vote is expected in mid to late October.

Importantly, even with its large size relative to Daylight, this deal will still leave the trust with CAD300 million of “safe harbor” capital, with which it can do more deals and avoid any trust taxes before 2011.

These are no doubt challenges. The good news is management is no stranger to them. Ultimately that’s the main reason to buy and hold Daylight Resources Trust for high income and hefty capital gains, so long as it trades below USD11.

For more information on Keyera Facilities Income Fund and Daylight Resources Trusts, visit How They Rate. Click on the “.UN” symbol to go to the website of our Canadian partner MPL Communications for press releases, charts and other data. These are substantial companies, so any broker should be able to buy them, either with their Toronto or OTC (US over-the-counter) symbols. Ask which way is cheapest.

Click on the trusts’ names to go directly to their websites. And click on their US symbols to see all previous writeups of these trusts in Canadian Edge and its weekly companion Maple Leaf Memo.

Note that both trusts’ dividends are considered qualified for tax purposes in the US. Tax information to use as backup for filing them as qualified–whether or not there are errors on your 1099–is listed on the Canadian Edge website; mouse over “Resources,” then click “Income Trust Tax Guide.”

As is customary for virtually all foreign-based companies, the host government–in this case Canada–withholds 15 percent of distributions paid to US investors at the border. This tax can be recovered by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation, though unrecovered amounts can be carried forward to future years.

Keyera’s decision to convert to a corporation without cutting its distribution basically removes any prospective 2011 risk.

Daylight management, meanwhile, continues to affirm its intention to pay generous distributions after 2011, when it will begin paying taxes. What it can pay, moreover, will be far more affected by the level of energy prices than any new taxes. And the post-deal company will have a growing base of CAD1.4 billion in tax pools, i.e. accumulated non-cash expenses on its balance sheet.

The bottom line is 2011 taxation is no longer a real issue for distributions of either company. Instead, payouts going forward depend wholly on the health of their underlying businesses, which remain among the most robust in the energy patch.