The ad we’ll look at today starts, as they always do, with an incredible promise:

“How to Claim Your First ‘Gas Rebate’ Check on January 15

“Some smart Americans have begun collecting checks from a little-known government-guaranteed gas rebate program. And they’ll continue receiving payments until 2011. Now you can join them….

“Simply put your name on the list below to claim your ‘Gas Rebate’ checks ($400-plus every month!) starting with the next payout…

“New York Times reports that Americans “are making significant amounts of money” from this gas rebate program”

Sounds interesting, eh? Clearly there’s some obfuscation afoot, but we do love to see all the details. How did this kind of “Gas Rebate” come into being?

You can sign up for your membership in the Oxford Club if you want to hear their version … but if you’ve got a few moments, I’ll dig in and see if I can explain it for you and chase down these clues (for free, naturally).

The letter is signed by Louis Basenese, who we see cropping up quite often as an Oxford Club analyst, and he spreads it on nice and thick …

“As a former analyst for a Wall Street bank with $749 billion in assets under management, I’ve seen my fair share of “get rich quick” schemes.

“And I must admit, I was skeptical when I heard about this gas rebate program. But in the five months I spent researching this opportunity, I discovered that it is very real… and can be very profitable.
This Gas Rebate Program dates back to 1985 when gas prices also spiked….

“So they passed legislation that required certain energy companies to distribute rebate checks to everyday people.

“But over the years as gas prices retreated, people forgot about the program.

“Even last year, when prices reached all-time highs, only a handful of Americans were turned on to this opportunity. As Marketwatch recently revealed, ‘Few people know about [the Gas Rebate Program]… but this is a great income generator.'”

So what is this “gas rebate check” that Louis says you can “sign up” for? Well, it’s an investment, of course — not a government program, really, but an investment vehicle that was created by a government decision.

Oh, and it wasn’t even our government — it was Canada’s. What the Oxford Club folks are teasing here are Canadian Income Trusts (Canadian Royalty Trusts, CanRoys, whatever — there are several terms that are used to refer to these … not, until now, “Gas Rebate Checks”, however).

These trusts are fairly similar to a Real Estate Investment Trust in terms of taxation — these companies don’t pay corporate income tax, and in return they pass through the vast majority of their income to unitholders, who are then obligated to pay tax on that income. Traditionally most of these trusts in Canada have been in the oil and gas production business, and they tend to pay their dividends on a monthly schedule, which has been very appealing for income investors for many years — high dividends, rising nicely thanks to the steady climb of oil and natural gas prices in recent years (until this past Summer, at least), and monthly payouts.

There are several good US-based oil and gas trusts as well, but they are really closed-end trusts that own royalties on specific oil or gas production facilities or fields, and they are essentially owners of depleting assets that they can’t replenish — trusts like San Juan Basin or BP Prudhoe Bay or the several others exist solely to deplete an oil field (or multiple fields), and when production at that field stops they essentially go out of business. Canadian trusts, however, had the ability to grow — they were allowed to buy and sell assets and interests in new discoveries or developments, so the ones that reinvested well and built their asset base were able to grow dramatically over the years and continually replenish their base of reserves. I say “had” because although they still can grow and replenish reserves, that 2011 bit in the introduction is real — these investments will probably change dramatically in almost exactly two years … more on that in a moment.

The “came into being” in 1985 part refers to the court decision in Canada that allowed for the income trust structure to be used — specifically, the fund that came out of that case as an income trust remains probably one of the couple most significant and steadiest Canadian energy trusts, Enerplus Resources Fund (ERF).

Just as an aside, I’d argue that it now seems a little silly to say that prices “spiked” in 1985, that year was part of a long and gradual downtrend in oil prices, and though the price of oil did briefly jump from $24 or so to $30 they spent much of the year in the high $20s, a bit lower than the previous couple years. But we’ll let it pass, there was a wee spike that Spring.

The 2011 date refers to the change of Canadian tax law which will essentially do away with royalty trusts as they’re currently structured (some may hold on for a while, depending on their strategies for handling other tax credits, and many of them may remain high-dividend corporations, though the ridiculously high yields of the past few years seem very unlikely to persist for most trusts). Many folks have called the initial proposal for this new tax law change the “Halloween Surprise,” happening as it did on October 31, 2006.

And there remains a lot of debate about exactly what the trusts will do, how they will change or cope, and what will happen to investors who own the shares. A few trusts have since been acquired, since the depressed prices made them look appealing for private buyers — but falling oil and natural gas prices made that a bit less appealing in the second half of this year, so in many ways Canadian trusts seem to be in a holding pattern as we await more clarity about the changes that 2011 will bring.

It may well be that many of these trusts will continue to exist, using tax credits or whatever else to remain yield-focused, tax-paying corporations going forward, but it would probably be a mistake to assume that you can buy them now, get two years of high dividends (assuming oil prices don’t continue falling), and then end up with something that has a predictable value in January of 2011. It’s very hard to know what might happen to these companies in two years, and most of them are still being fairly mum about their specific plans for dealing with the new tax regime. Plus, we have to consider that once the income trust tax advantages get erased, there’s still some likelihood that the firms will continue to get some tax advantages — every country likes to protect their local energy producers, and politicians don’t hate these companies nearly as much when oil is at $40 a barrel as they might have at $150.

And the article from the NY Times? That quote is accurate, it was from an S&P credit analyst who did note that people (not just Americans” were making significant amounts of money. But the article that quote appeared was published in 2004, when oil prices were climbing and it was an almost unimaginably great time to invest in Canadian trusts — so great, in fact, that that was really when the government started to notice the huge amount of money being distributed from trusts to foreign investors that was effectively (in many cases) never really being taxed. And a couple years later, the government felt the need to do something, and the tax law changed and the trust prices collapsed overnight.

Lately, with stimulus being the word of the day from governments everywhere, and with the political situation in Canada in severe flux (they’ll probably either have a weak minority government or a new election soon, and the partisanship posturing is now rivaling our own here South of the border), I keep hearing from folks who believe that the taxation of trusts will become a political football again, perhaps leading to a “stimulative” reversion to the old tax-free status or some other kind of compromise. I have no idea whether this is just blind hope, or if there’s any possibility of real change to the law before 2011 (I know there are a good number of Canadian readers out there, so if you’ve got a perspective on this, please feel free to share with a comment below).

If you’re curious about the whole history of these funds/trusts, and about the debate about the tax changes, the Wikipedia article about this is pretty good, just FYI.

But wait, we’re not done yet!

So we know that the Oxford Club folks have been touting Canadian Income Trusts, and specifically some oil and gas-related trusts. We also know that there are certainly some of these that are better than others — so which ones are specifically teased for us here? We’ve got three that are teased … can the Gumshoe track down the clues?

Let’s give it a look-see, no?

There is really one of these trusts that is the focus of the ad, and that appears to be the main or favored investment idea, so we’ll start there:

“There’s one under-the-radar company that is legally obligated to siphon off the majority of its $640 million cash flow and pass it on to everyday people.

“Last year, it distributed $610 million to just a few thousand check recipients.”

That’s probably enough to narrow it down for us, but they do provide a few other clues:

This is an integrated firm, to a much greater degree than most trusts, with refining and distribution assets (including some gas stations) as well as drilling (they produced 20 million barrels of oil last year)

“… this company is sitting on $351 BILLION DOLLARS worth of oil at current prices… right here in North America! There’s nothing to disrupt the flow of oil or profits… or rebate checks.”

This one is Harvest Energy (HTE in both NY and Toronto)

Harvest Energy is indeed one of the larger trusts, and it did distribute $610 million to unitholders last year. It has also significantly outperformed the average income trust over the last five years. They had a reserve life index of just over ten years as of the last annual report (for 2007), though I don’t know if current oil prices change those underlying assumptions at all, or if they have acquired significant new reserves this year. Those reserve life numbers are a key consideration for any trust, they essentially estimate the number of years of oil and gas production that the company can expect if they don’t replenish their reserves or change their production levels — some people think of this as a shorthand for the number of years you might expect to receive distributions if the company stopped investing in new assets.

They have pre-announced their dividends through March, so the expectation is that unitholders will receive thirty cents (Canadian) per share on the 15th of January, 16th of February, and 17th of March. After that, who knows — if they keep up that annualized dividend rate, which is certainly not guaranteed, you’d be looking at an annual yield of about 35% based on today’s share price of US$8.36 and the current exchange rate.

And yes, the fact that the current yield is 35% means that most investors assume that the falling oil and gas price, and the impending tax law change in a couple years, means that the yield will fall — either because the company will cut the dividend, or because the share price will drop.

I know there are a lot of folks out there in Gumshoedom who have a lot of experience with CanRoys, and probably several who hold this particular stock … I’ll let you hash out amongst yourselves what’s going to happen in 2011, and whether or when you think the dividend will drop, and by how much. If you like CanRoys, it’s certainly reasonable to put this one on your short list.

Now, a quick look at the other two that were teased …

More from Basenese:

“There are still two more opportunities… similar companies raking in fuel profits and being forced by the government to funnel millions back to ordinary people like you and me.

“Together, these three companies make up what my colleagues and I call the ‘Gas Rebate Program.’

“According to Forbes, these opportunities offer ‘fat payouts’ that ‘ease your pain at the pump.'”

“But you must get in before the deadline to qualify for your first check on January 15th.”

(just FYI, if you want the HTE dividend for January, the “deadline,” which the company would call the “ex distribution date” is December 29, meaning you have to own shares by December 28 to get the next divideend — so you’ve got a couple days to think about whether or not you want that 30 cents on January 15).

Oh, and just by the way — they tease this as a “$3 billion company,” which means these ads were written probably back in September, the shares have fallen by much more than 50% since then, the market cap is now about half that.

“Gas Rebate Opportunity #2:

“This opportunity provides you with direct access to a $1 billion gas revenue stream.

“Per government mandate, this company returns roughly 70 cents of every dollar it earns to check recipients. And although the government has decided to end the Gas Rebate Program in 2011, investors in this particular company have discovered a secret “loophole” that means they could continue receiving hefty checks until 2014.

“This is a stable, long-term income play. Since it started distributing checks, this company has never reduced payouts. It has only increased them.”

This one is a bit more of a guess for the mighty Thinkolator, but from those clues I’d have to tell you that this is Penn West Energy (PWE). I don’t know much about this one, but I can tell you that they do think they have announced in the past that they think they have enough Net Operating Loss credits to keep them shielded from the new tax law until 2014, and they have never cut their dividend … though I wouldn’t bet much on their ability to keep that going.

You can dig into this one if you like, and let us know if you’ve got any strong feelings about Penn West — the market has spoken, and they trade at an annualized yield of about 30%, so that’s what Mr. Market thinks about the safety and security of that dividend going forward. The market can be wrong, of course, and if you’ve got a good crystal ball for oil prices and political decisions you may well do great with any of these.

And the last one?

“Gas Rebate Opportunity #3:

“This energy company was the first of its kind to send out gas rebate checks 22 years ago. Back then it was worth barely $9 million dollars. Today its value exceeds $7 billion.

“In 2007, the company sent out over $646 million in checks. But this year, it’s on track to deliver even more. This company just announced that it will increase distributions by 12%.

“By depositing a bit of cash with this company, you can collect an easy $117 each month… that’s more than $1,404 each year.”

This is Enerplus Resources Fund (ERF), which was indeed the first of its kind after that court decision in 1985. And they did distribute $646 million in 2007, though pay close attention if you research this one: They are among the more conservative trusts when it comes to their balance sheet, and they have scaled back development spending for next year thanks to the lower oil and gas pricing, but they have already announced that they’re shrinking their dividend. The distribution for January will be 25 cents (Canadian) — current price is about US$18, so the fact that they’re larger and have a strong and stable reputation means that their annualized yield is “only” up to 20%.

To be fair, they did increase distributions in September — but they cut them again in November, and, as noted, they will do so again next month.

So what does one do with an investment that should have a high yield for two years, then a very uncertain several years of adjusting, and perhaps or perhaps not a future as a high dividend company in the years then to come?

And while most of these large trusts have established fields that can make a nice profit with oil and gas at these prices, they also will almost all probably have to cut their dividends and their capital spending, which some will do better than others — and if you think any of those companies know whether oil will be at $25 or $75 in six months, you’re more confident than I am.

So now it’s your turn — throw on that thinking cap, and let us know if you’re ready to bring those Canadian trusts into your portfolio. As with so many things that look cheap and compelling based on the numbers, there’s a reason for the prices to be so low … whether it’s a good reason, well, that’s your call.