The second quarter was a rocky one for global equities, though a July rally made up for some of the pain caused by fears of a European debt crisis and a double-dip recession in the US during the April-through-June period. Recent economic data, particularly from Europe, have been slightly more positive than macro numbers we saw in early summer. And policymakers–at the fiscal and monetary levels–will be quick to act with whatever tools they have left to prevent another serious downturn, be it the second half of a double-dip or a whole new recession.

What earnings reports provide is a detailed, on the ground look at how actual operating companies are faring. We’re interested in is how well dividend payers covered the payout with earnings in the case of corporations or distributable cash flow (DCF) or funds from operations (FFO) for remaining trusts. We’re also focusing on management’s guidance for the remainder of 2010; we’re interested in their forecasts and planning and what these factors say about the direction of the economy. And we’re looking for word on post-2010 plans for those that are still structured as trusts.

We have a good idea of what’s going on at the macro level: The developed world is suffering through an underwhelming recovery after a severe recession. Data will be lumpy and opaque for some time as consumers and governments the world over deleverage. Here we’ll take a look, on a company-by-company basis, at what’s happening on a micro level. The most important thing for income investors to focus on is the health of the business that’s supporting your dividend checks.

We’re taking care of Canadian Edge Aggressive and Conservative Holdings in Portfolio Update. What follows is a run-down of highlights from members of the How They Rate coverage universe that have reported thus far, with particular focus on converting or already converted truts.

Oil and Gas

Bellatrix Exploration Ltd (TSX: BXE, OTC: BLLXF), the former True Energy Trust, discontinued its distribution upon conversion in early 2009. It’s now a growth-oriented explorer focused on western Canada. The company reported a narrower second-quarter loss on higher realized prices. Natural gas revenue contributed approximately 51 percent of total petroleum and natural gas sales, crude and natural gas liquids (NGL) the remaining 49 percent.

In July Bellatrix produced 1,317 barrels per day (bbl/d) of crude oil, 759 bbl/d of NGL, and 36.3 million cubic feet per day (mmcf/d) of natural gas, or a total of 8,135 boe/d. The company drilled a total of 25 gross with a 96 percent drill bit success rate.

Management maintained 2010 production guidance of approximately 8,500 barrels of oil equivalent per day (boe/d) and an exit rate of approximately 10,000 boe/d. Fifty-four percent of natural gas production is hedged at CAD6.56 per thousand cubic feet (mcf) for 2010.

Bellatrix retired a 7.5 percent convertible unsecured debenture with proceeds from a 4.75 percent note and lower-cost bank debt. In late July the company raised CAD20 million through a bought-deal private placement of 4.71 million “flow-through shares.” Its ability to raise capital in the debt and equity markets bodes well for long-term production growth. Bellatrix Exploration is a buy up to USD4.

Bonavista Energy Trust (TSX: BNP-U, OTC: BNPUF) reported a 28 percent increase in funds from operations to CAD130.1 million (CAD0.85 per unit) from CAD101.7 million (CAD0.85 per unit) during the second quarter of 2009. The company paid out CAD63.9 million (CAD0.48 per unit). The 49 percent quarterly payout ratio was up slightly from 48 percent a year ago.

Bonavista boosted by production by 27 percent to a company record 65,885 barrels of oil equivalent per day (boe/d). Natural gas production increased 35 percent to 238 million cubic feet per day (mmcf/d) from 176 mmcf/d a year ago, while total oil and liquids production increased 17 percent to 26,187 bbl/d from 22,378 bbl/d. Current production is approximately 68,500 boe/d, 62 percent natural gas, 31 percent light and medium oil and 7 percent heavy oil.

Production revenue increased 37 percent due mainly to increased production volumes. Realized natural gas prices increased 7 percent year over year; average oil and liquids prices decreased 3 percent. Operating costs per barrel of oil equivalent (boe) declined 23 percent year over year to CAD7.94 from CAD10.25.

Bonavista drilled 61 wells in the first half of the year at a 98 percent success rate, resulting in 34 natural gas wells and 26 oil wells. Growth efforts have lifted Bonavista’s reserve life index (RLI) to 11.7 years. Management expressed pleasant surprise at the results from its first-half 2010 exploration and development efforts, noting that they’ve “exceeded our expectations.”

Management has established some stability for the balance of 2010 by hedging 32 percent of forecast natural gas production at an average price of CAD5.24 per thousand cubic feet (mcf) and 44 percent of forecast oil and natural gas liquids (NGL) production at an average floor price of CAD68.56 per barrel (bbl).

Bonavista increased its capital spending budget for 2010 to CAD600 million to CAD630 million, approximately 75 percent of which will go to cost-effective horizontal drilling activities. Based on year-to-date drilling success management boosted its production forecast for 2010 by approximately 2,000 boe/d to average volume of between 66,500 and 67,500 boe/d.

As for its post-2010 plans, management remained noncommittal. “We anticipate the conversion to a dividend paying corporation at the end of 2010 and the subsequent pursuit of a hybrid business model that is designed to provide our investors a combination of growth and income,” Bonavista noted in its second quarter Management Discussion & Analysis (MD&A). “We will provide more detailed guidance including targeted growth rates and payout ratios closer to year end.” Bonavista Energy Trust is a buy up to USD22.

Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF) sold approximately 119,000 bbl/d during the second quarter, up 55 percent from 76,000 bbl/d in the year-earlier period. Operating costs came down from a second-quarter 2009 figure of CAD50.23 per barrel to CAD31.18.

Lower turnaround costs and stock-based compensation expenses this year contributed to the decline. These factors were offset by expanded mining and production and concomitant unplanned repairs and maintenance. Lower costs also reflect the higher sales volume in 2010.

Cash from operating activities, used to pay distributions to unitholders, was CAD358 million (CAD0.74 per unit). The trust paid out CAD242 million, for a payout ratio of 68 percent.

Unplanned outages at Syncrude’s upgrading operations this month forced it to reduce its annual production target by 5 million barrels to 110 million barrels, about 40.4 million barrels net to Canadian Oil Sands, with a range of 108 million to 113 million barrels. Management forecast full-year operating costs of CAD37 per barrel. Full-year cash from operations should approach CAD1.1 billion (CAD2.27 per unit).

Management reiterated that Canadian Oil Sands’ corporate dividend will depend, as does the trust distribution, on oil prices. The trust’s conversion “on or about” Dec. 31, 2010, has already been approved by its board of directors, Canadian Oil Sands unitholders and the Court of Queen’s Bench of Alberta.

Following conversion, in its own words, “Canadian Oil Sands expects its approach to dividend payments to be very similar to its management of distribution payments as a Trust.” Canadian Oil Sands Trust is a buy up to USD30.

Electric Power

Primary Energy Recycling (TSX: PRI-U, OTC: PENGF) reported a 19.1 percent revenue increase on a 15 percent increase in electricity production, which keyed a CAD3.3 million improvement in net loss for the second quarter compared to the second quarter of 2009. Adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) rose 22.6 percent. Electricity production was up 15 percent.

Operations and maintenance expenses were higher in the quarter because of previously announced overhaul and long-term maintenance work at two facilities. Following the end of the quarter another facility was down for 14 days in an unplanned outage; the unit is back in service.

Operating income for the second quarter of 2010 was CAD100,000, a modest reversal of a CAD1.3 million operating loss a year ago.

Primary Energy Recycling is long way from paying a dividend, which it “discontinued” a little more than a year ago, but its progress in the second quarter earns it a boost from “sell” to “hold.”

Business Trusts

IESI-BFC (TSX: BFC, NYSE: BFC) reported an 18.1 percent revenue increase, while free cash flow was CAD44.2 million, more than double the CAD21.5 million reported in the second quarter of 2009. Growth was keyed by strong operations, lower interest rates and reduced debt, lower capital and landfill purchases. These factors were partially offset by higher Canadian cash taxes.

Organic growth in Canada was driven by price (3 percent) and volume (7.2 percent) increase, while higher fuel surcharges (0.9 percent) and recycling and other pricing (0.9 percent) also grew quarter over quarter. US organic revenue rose 6.9 percent on price growth of 2 percent, a fuel surcharge increase of 0.4 percent, recycling and other pricing growth of 1.1 percent and volume growth of 3.4 percent.

Management, adjusting prior guidance to account for the Waste Services acquisition, forecast full-year free cash flow will be within a range of CAD190 million to CAD200 million. IESI-BFC anticipates maintaining its CAD.050 per share annual dividend. A 23 percent second-quarter payout ratio reflects management’s conservative approach, but this allows the company to continue an active growth-through-acquisitions strategy. Priced a little beyond reasonable, however, IESI-BFC is a hold.

Natural Resources

Acadian Timber Corp (TSX: ADN, OTC: ATBUF) reported second-quarter net sales of CAD12.2 million on volume of 270,000 cubic meters, a 100 percent improvement in revenue and a 72 percent increase in volume compared to the second quarter of 2009. The softwood lumber market is clearly getting better, though the second quarter is usually among Acadian’s weakest due to weather factors. In fact, the company’s payout ratio was negative during the period; the shortfall will be accounted for once improved access to roads and timberlands shines through in the third quarter.

Acadian completed its conversion to a corporation on Jan. 1, 2010, and began paying a CAD0.05 per share quarterly dividend; it declared another CAD0.05 payment for the third quarter.

Looking ahead, management is taking a conservative approach, even though conditions in the US appear to have improved somewhat. Despite improvement, management noted in its statement announcing earnings, “The market for softwood sawlogs is expected to continue to experience weak demand and soft pricing through 2010 and into 2011.” Acadian Timber is a buy up to USD7.

Canfor Pulp Income Fund’s (TSX: CFX-U, OTC: CFPUF) 49.8 percent-owned Canfor Pulp LP generated second-quarter DCF of CAD62.5 million (CAD0.88 per unit); the partnership and the income fund declared distributions of CAD0.52 per unit, for a 59 percent payout ratio.

Higher prices pulp and paper products were partially offset by a stronger Canadian dollar, lower shipments and higher freight costs. Operations were solid, as the LP set records for total tonnes and daily production rate.

Softwood pulp markets remained tight through the second quarter, as steady demand and continued tight supply of global softwood pulp supported further price increases. The NBSK pulp list price in North America during March 2010 was USD910 per tonne with monthly price increases through the second quarter of 2010 resulting in a price for June 2010 of USD1,020 per tonne. The NBSK pulp list price for July is unchanged from June at USD1,020 per tonne for North America. The global supply/demand balance still favors producers, but pressure is coming from China. Management noted that reduced pulp consumption from Asia and seasonal weakness in the summer could hurt prices over the next three to six months.

Along with its second-quarter earnings Canfor announced a CAD0.22 monthly distribution for July, to be paid Aug. 13 to unitholders of record on July 30–a 10 percent increase from the prior month’s CAD0.20 level. Canfor Pulp Income Fund is a buy up to USD15.

Energy Services

Mullen Group (TSX: MTL, OTC: MLLGF) reported consolidated revenue of CAD214.6 million for the three months ended June 30, up 5.9 percent from year-ago levels, as the Trucking/Logistics segment grew through acquisitions and higher fuel surcharges and the Oilfield Services segment enjoyed stronger demand because of renewed activity in northern Alberta’s oil sands.

Mullen Group generated operating income for the quarter of CAD33.5 million, a 16.3 percent increase from the second quarter of 2009. FFO for the period was CAD25.9 million, up 30.2 percent from a year ago. Mullen paid out CAD10 million to shareholders, for a payout ratio of 39 percent. Mullen Group, which will continue to grow along with an oil sands revival, is a buy up to USD15.

Precision Drilling Corp (TSX: PD, NYSE: PDS) is the successor entity to Precision Drilling Trust, which completed its conversion on May 11. The trust had discontinued its distribution in Feb. 2009, amid one of the most remarkable global economic meltdowns in modern times.

The company is still righting itself.

Conditions continue to improve, as Precision upped its forecast to an average of 78 rigs on term in 2010, up from 75 average rigs when the company reported first-quarter results. For 2011, Precision boosted is current count to 45 from 41 at its last report. Precision’s Canadian rig count was 77 the morning of its earnings announcement, up from 51 a year ago. Resumption of oil drilling activity in the Cardium play, where Precision has 11 rigs, and the Viking play, where it has nine, is driving the rise. Precision has 91 rigs working in the US, two in Mexico, and one contracted but stacked that the company is receiving margin payments on. A year ago Precision’s US rig count was 52.

During the three months ended June 30 Precision brought its debt-to-capitalization ratio down to 0.21; at the end of the quarter the company had cash on hand of CAD186 million and, in management’s words, “continued to carry ample liquidity.” Operating earnings for the period were CAD20 million, down 37 percent from the second quarter in 2009. The decline is attributable to lower prices for Precision’s services.

Average revenue per utilization day for contract drilling rigs decreased to USD18,733 from USD24,817 in the US  and to CAD16,309 from CAD18,335. Average operating costs per day for drilling rigs decreased to USD12,626 from USD14,405 in the US and to CAD10,318 from CAD10,685 in Canada.

Precision expects to have an average of approximately 82 rigs committed under term contract in North America in the third quarter of 2010 and an average of 68 rigs contracted for the fourth quarter. In Canada, term contracted rigs generate from 200 to 250 utilization days per rig year due to the seasonal nature of well access, whereas in the US they generate about 350 utilization days per rig year in most regions.

For 2010, Precision expects to have an average of approximately 78 rigs under term contract, with 41 rigs contracted in the US, 36 in Canada and one in Mexico. For 2011, Precision expects to have an average of 24 rigs in Canada under term contract and 21 in the US, for a total of 45 for the full year.

Precision Drilling, solid play on a rebound in North American drilling activity, is a buy up to USD8.

Energy Infrastructure

Enbridge Income Fund (TSX: ENF-U, OTC: EBGUF) reported DCF of CAD23.7 million for the three months ended June 30, basically flat with the year-ago quarter, and declared CAD9.9 million of distributions to unitholders, for a payout ratio of 42 percent. This is consistent with the second-quarter 2009 payout ratio.

Enbridge unitholders approved the fund’s plan to convert during a May special meeting. According to management, “This new structure maintains our value proposition for investors–providing a safe and dependable high cash payout–while also providing greater financial flexibility going forward to fund growth opportunities. Further communication regarding the process by which unitholders will exchange their trust units for shares of the newly created Enbridge Income Fund Holdings Inc will follow over the coming months.” Enbridge Income Fund is a buy up to USD13.
Food and Hospitality

A&W Revenue Royalties Income Fund (TSX: AW-U, OTC: AWRRF) reported same-store sales growth of 1.1 percent for the second quarter–the 29th straight quarter of such growth–and 3.4 percent for 2010 to date. DCF year to date is up 10.3 percent to CAD9.8 million. The sales increase fueled a 4.2 percent increase in royalty income and DCF per unit increasing to CAD0.349 for the quarter from CAD0.343. The fund also declared its regular monthly distribution of CAD0.106 per unit. Distributions of CAD0.318 per unit were declared in the second quarter, for a payout ratio of 91 percent. A&W Revenue Royalties Income Fund is a buy up to USD18.

David Dittman is associate editor of Canadian Edge. He’s also co-author, along with Yiannis G. Mostrous and Elliott H. Gue, of the forthcoming FT Press volume The Rise of the State: Profitable Investing and Geopolitics in the 21st Century, available now via pre-order at Amazon.com.

Editor’s Note: For additional information on this topic, check out Roger Conrad’s latest report on Top Canadian Income Trusts.