“The Canadian oil sands” isn’t a solution Speaker of the US House of Representatives Nancy Pelosi (D-CA) would include in her ideal energy plan. Nevertheless, she left both sides of the oil sands debate in Canada happy following her visit to Ottawa in early September, though the Speaker’s tone in public comments following the meetings strongly suggests she won’t oppose US State Dept approval of TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL pipeline, which is due sometime before year’s end.

Ms. Pelosi represents one of the most progressive Congressional districts in the country, San Francisco; although her actual words were non-committal–she said in a statement issued afterward that the meetings “confirmed that the United States and Canada share a strong commitment to addressing climate change and energy security”–the dramatic shift from her prior opposition to the oil sands is telling.

While she may not win reelection by as large a margin as she is accustomed to come November, reality dictates that the No. 3-ranking US elected official (for now) get with a program that recognizes the need to encourage the development of new, cleaner technologies and also acknowledges that synthetic crude produced from Canada’s oil sands is essential to US energy security.

There’s progress being made on the technology front. But there’s no way the US will find a better energy friend than it already has in Canada.

Surface mining accounts for 55 percent and in-situ 45 percent of oil sands production. However, in-situ production is expected to surpass surface mining production by 2016. This is a matter of necessity: 80 percent of total reserves–135 billion barrels–are only recoverable only through in-situ technologies because the oil sands are so deep that the costs of removing the overburden for open-pit extraction are prohibitive.

Combined with the high operating costs inherent in traditional extraction methods, increasing pressure from environmental stakeholders concerned with the size of the mining footprint and the widely shared desire for “energy independence,” there’s plenty of incentive for Ms. Pelosi to support, tacitly or expressly, significant investment in oil sands technology development.

In-situ technologies currently in use include steam-assisted gravity drainage (SAGD) and cyclic steam simulation (CSS). Research is underway for further, potentially more cost-effective and less environmentally intrusive technologies. One is vapor extraction (VAPEX),  which uses hydrocarbon solvents instead of steam to dilute the bitumen in place, allowing the bitumen to release from the sand and to flow more easily for extraction at lower heat and thus with lesser energy input.

Petrobank Energy and Resources Ltd (TSX: PBG, OTC: PBEGF) is testing toe-to-heel air injection (THAI) at its Whitesands project. Excelsior Energy Ltd (TSX-V: ELE, OTC: EXEYF) is developing combustion overhead gravity drainage (COGD), which it claims will recover twice the oilwith only 20 percent of the energy input necessary for traditional SAGD. Cenovus Energy (TSX: CVE, NYSE: CVE) plans to test a solvent-assisted steam process that it says could cut greenhouse gas emissions by 25 to 30 percent.

It’s a little known fact that Canada is the largest exporter of oil to the United States. It’s been the leader since 2000, when, at 16.4 percent, it beat out Saudi Arabia (15.2 percent), Venezuela (14.8 percent) and Mexico (9.8 percent). Last year Canada provided 23.2 percent of US imports, topping Venezuela (10.7 percent) and Saudi Arabia (10.4 percent). The top 10 US suppliers, which together accounted for about 85 percent of imports, also included Nigeria (8.2 percent), Russia (5.8 percent), Algeria (5.1 percent), Angola (4.7 percent), Iraq (4.7 percent) and the Virgin Islands (2.8 percent).

That’s not exactly a who’s who of pro-American nations. And even those with whom the US shares relatively cordial relations are nowhere near as conveniently located as Canada.

A growing share of those US imports comes from the Canadian oil sands region, an area the size of Florida that’s home to approximately 175 billion barrels of recoverable crude, the second-largest store in the world behind Saudi Arabia’s. In 2008 oil sands production represented approximately half of Canada’s total crude oil production. The Canadian Association of Petroleum Producers (CAPP) estimates that the oil sands will contribute 53.5 percent of total domestic output in 2010, or 1.5 million barrels per day. According to the most recent CAPP forecast, output will nearly double over the next decade.

Although US crude consumption declined during the Great Recession the resumption of some approximation of normal economic activity has sent burn rates soaring again, and oil sands production in Alberta and Saskatchewan is in high gear again: There are more than 27,700 oil sands workers right now, 3 percent above the previous peak established in 2008.

Absent a disruptive innovation that makes renewable energy scalable at an affordable cost the US will consume a lot of fossil fuel over the next several decades. With less than 5 percent of the world’s population the US accounts for more than 22 percent of daily global crude consumption, about 21 million barrels per day. Domestic consumption is forecast to reach 28 million barrels per day by 2025, even as the developing world, including China and India, uses more and more fossil fuels to sustain rapid economic growth.

Soon the share of total US oil imports sourced from Canada will be 33 percent, most of that comprised of oil sands output. Canadian output from conventional sources has been declining for more than a decade; crude from Alberta’s and Saskatchewan’s oil sands already make up more than 10 percent of America’s fossil fuel imports.

TransCanada’s 1,675-mile Keystone XL pipeline, if it gets built, will carry more than 900,000 barrels per day of oil sands output to processing facilities in Oklahoma and Texas. High-grade crude from domestic US producers in places like North Dakota will also be able to tie in and get their easily refined output to markets where they can receive premium prices for it. It would, for all intents and purposes, enable the doubling of Canadian oil sands imports to the United States. 

It’s a messy business, but right now there is no reality-based alternative to the carbon-based economy, and there are few sources for crude that aren’t controlled by unstable or unfriendly political regimes. The build-out of the infrastructure to support a renewable revolution could be the key to re-starting the American economic growth engine. Someday we’ll get there, and we hope our children (or their children) are there to enjoy the full glory of the renewable era.

In the meantime, the US needs the Canadian oil sands.

The Roundup

Canadian Edge Portfolio Aggressive Holding Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) has done nothing but run since announcing its intent to convert to a corporation on Dec. 31, 2010. The stock seems poised to push its 52-week high after rallying more than 8 percent since Tuesday evening’s announcement.

The conversion will include a 50 percent reduction in the monthly payout, from CAD0.12 per unit to CAD0.06 per share, beginning with the January 2011 distribution, “as part of a plan,” in management’s words, “to deliver more return to investors through growth.” Management’s plan that the loss in regular cash income for investors will be more than made up for by capital appreciation seems to have been validated by the market, at least over the first couple days post-announcement. The cash saved with the dividend reduction will be used to fund to boost capital spending.

Management pointed out in its statement that Peyto’s reserves and production per share or unit have grown at a compound annual rate of 54 percent and 43 percent, respectively, over the past 12 years, growth that’s been reflected in the share and unit price. (Peyto became an income trust in 2003.) Average daily production in 2010 is up to 25,000 barrels of oil equivalent per day, a 39 percent increase from September 2009. Already a low-cost, high-output producer, Peyto has employed technological advances such as horizontal multi-stage fracturing to reduce costs even further while also boosting returns. The company continues to add horizontal drilling locations to its inventory, the production of which, based on an expanded capital program, should push the 2011 exit rate to between 33,000 and 37,000 barrels of oil equivalent per day.

Bay Street is certainly bullish on the Peyto’s conversion; of the nine analysts covering the stock, eight rate it a “buy” based on Bloomberg’s standardized system, while one says it’s a “hold.” (And the “hold” rating is, in the words of the analyst, “sector perform,” with a CAD16.50 price target. Bloomberg attempts to standardize the aggregate ratings nomenclature derived from a number of Bay Street and Wall Street houses. The analyst reiterated the “sector perform” rating and a CAD16.50 target with the stock priced at CAD14.35, Tuesday’s close. From where the analyst was sitting, he still saw 15 percent upside in the stock.) FirstEnergy Capital upgraded Peyto to “outperform” with a CAD17.50 target.

Although management stated at one time that it could maintain its current payout after a conversion, we noted back in June that decision-makers might choose to pump more cash into reserve and output growth as a more “tax efficient” way to build wealth for investors. Given that natural gas, which accounts for more than 80 percent of Peyto’s production, has stayed within a range of USD4 to USD5 per million British thermal units, a cut along the lines of Daylight Energy’s (TSX: DAY, OTC: DAYYF) 37.5 percent reduction seemed a likely course.

The CAD0.72 per share post-conversion annualized payout works out to a yield of 4.6 percent, based on Thursday’s closing price. But the track record suggests management will deliver on a total return model and continue to grow reserves and production. Though the dividend cut was steeper than we anticipated, Peyto has been and will continue to be a solid long-term holding for investors who seek stable income and reasonable growth–whatever form it takes. Peyto Energy Trust is still a great way to play the eventual recovery of natural gas up to USD16.

Fellow Aggressive Holding Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF) announced the purchase of several Bakken and Marcellus assets and sold its Kirby oil sands lease.

The company signed a deal to acquire 72 sections of land in the Fort Berthold area of Dunn and McKenzie counties in North Dakota for CAD456 million. The 46,500 net acres are adjacent to Enerplus land holdings. The agreement includes 800 barrels per day of light crude production and proved plus probable reserves of 10 million barrels of oil equivalent. The company also closed acquisition of acreage in the Marcellus shale natural gas play in Preston County in West Virginia and Garret County in Maryland.

Enerplus sold its Kirby steam-assisted gravity drainage oil sands lease for CAD405 million and non-core conventional assets for CAD158.5 million. Proceeds will be used to pay down bank debt.
Management now forecasts exit production for 2010 of 80,000 to 82,000 barrels of oil equivalent and has added CAD30 million to its capital budget. Enerplus Resources Fund is a buy up to USD25.

Here are third-quarter earnings announcement dates for CE Aggressive Holdings:

• Ag Growth International (TSX: AFN, OTC: AGGZF)–Nov. 12
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–Nov. 1 (confirmed)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 11
• Daylight Energy (TSX: DAY, OTC: DAYYF)–Nov. 4
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–Nov. 12
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Nov. 5
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)–Nov. 5
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–Nov. 5
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Nov. 9
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–Nov. 11
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–Nov. 10
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–Nov. 4
• Vermilion Energy Trust (TSX: VET, OTC: VEMTF)–Nov. 5
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–Nov. 4

Conservative Holdings

Northern Property REIT (TSX: NPR-U, OTC: NPRUF) closed its previously announced offering of 1.9 million units, with the underwriters gobbling up their over-allotment option at CAD25.50 per unit. Gross proceeds were CAD49.5 million. Management will use the cash from the sale to pay down an operating line of credit and for general trust purposes. Northern Property REIT is a buy up to USD22.

Here are tentative third-quarter earnings announcement dates for the CE Portfolio Conservative Holdings:

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–Oct. 28 (confirmed)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 11
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 10
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–Nov. 10
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–Nov. 9
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–Nov. 3
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Nov. 12
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)–Nov. 10
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–Nov. 11
• Colabor Group (TSX: GCL, OTC: COLFF)–Oct. 7
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–Nov. 2
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–Nov. 4
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–Nov. 12
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–Nov. 5
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–Nov. 2 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–Nov. 3 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Nov. 10 (confirmed)
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–Oct. 28
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Oct. 26
• TransForce (TSX: TFI, OTC: TFIFF)–Oct. 29 (confirmed)

Electric Power

Emera (TSX: EMA, OTC: EMRAF) boosted its quarterly dividend by 15 percent to CAD0.325 per share, the second time in the past 12 months that it’s raised its payout. Emera’s target payout ratio is 70 to 75 percent of earnings per share. In 2009 the energy and services firm’s payout ratio came in at 65 percent. The latest increase will get the company in line with its stated goal. Emera is a buy up to USD24.

Energy Infrastructure

Westshore Terminals Income Fund (TSX: WTE-U, OTC: WTSHF) have announced a corporate conversion plan under which unitholders will receive a combination of shares and debt in exchange for their fund units.

Shares will be issued by a newly formed company, Westshore Corp. The debt, CAD5.00 per existing unit, will be issued in the form of secured, subordinated notes by a subsidiary of Westshore Corp. The notes will mature in 2040; the interest rate will be set next month. The shares and debt will be separate instruments but will be listed and trade together as units, much like the stapled-share structure adopted by New Flyer Industries (TSX: NFI-U, OTC: NFYIF).

Following conversion unitholders will receive interest on the notes and dividends on the shares based on the same record date and payment date. At this time management expects that “the dividends on the shares will be paid on essentially the same basis as is the current distribution policy of the fund.” Westshore’s current policy is “to distribute all of its earnings after interest (including on the new notes) and taxes but before depreciation and unrealized gains or losses on forward exchange contracts, less amounts equal to the expected cash requirements of Westshore, such as capital expenditures and special pension contributions.” Westshore Terminals Income Fund is a buy up to USD16.