There's a new wave of investment fever going on in the Canadian oil patch these days. And it has to do with royalty trusts. According to one source, Canada's 14 publicly traded oil and gas royalty trusts raised C$627 million during 2000-far and away more capital than was fetched by Maple Leaf producers during the same period. What's up? Amid relatively low interest rates and surging oil prices, these trusts' total rates of return-unit price appreciation plus distributions-are turning heads. What's more, some of these trusts trade on U.S. exchanges now. "Investor interest in Canadian royalty trusts is stronger than we've seen in past years; as a group, they're providing anywhere from 15% to 30% annual rates of return on a unit price appreciation basis, plus they pay double-digit distributions," says Toronto-based Glenn G. MacNeill, vice president, investments, for NCE Resources Group. His firm manages NCE Petrofund, a leading oil and gas royalty trust. During the first 11 months of 2000 it sported a total return of 93%. By comparison, the Toronto Stock Exchange Oil & Gas Producer Index in the same time returned 30.4%. Dispelling the perception that royalty trusts, since they pay out so much of their cash flow in distributions, are essentially wasting assets, MacNeill says, "The big difference between royalty trusts in the U.S. in the 1980s and those in Canada today is that we actually grow our asset base, production and distributions." During 1999, NCE Petrofund (Toronto: NCF.UN) replaced 490% of its production; in 2000, 400%. Daily production, meanwhile, rose from 10,980 equivalent barrels to 11,557 BOE, as annual distributions averaged 20%. The keys to this growth: reinvestment and reloading of the balance sheet. "Typically, we buy oil and gas properties opportunistically, finance those acquisitions with debt, then go to the capital markets to raise money to pay down that debt and keep our powder dry for the next acquisition." In 2000, NCE completed C$107 million worth of acquisitions while raising C$80 million through secondary offerings. Last November, it also listed on the American Stock Exchange under the symbol NCN. "We wanted greater liquidity, better market presence and the opportunity to get in front of U.S. investors," says MacNeill. Another Canadian royalty trust, Enerplus Resources Fund, has followed suit, recently listing on the NYSE as ERF. Petro Panarites, vice president and equity analyst for RBC Dominion Securities in Toronto, says that in 1999, after oil prices started to recover, the all-in returns for Canadian oil and gas royalty trusts averaged 50%, then rose another 50% again through last November. His outlook for these trusts going forward is sanguine. "Back in November 1997, when oil prices were US$20 and trust distributions peaked, the group had a forward yield (estimated forward-year distributions divided by current unit price) equal to 12%, using an assumption of $20 oil for 1998," he says. "Late in 2000, oil prices were $30-plus and the group's forward yield was 18%, using a fairly conservative 2001 oil price assumption of $25. So not only do we now have an oil price assumption that's below where crude has been recently trading, but we also have a higher forward yield on that basis." Says Panarites, "Putting all this together, we're looking at a group that's very attractive from an historical valuation perspective. In addition, the group today has healthier balance sheets and more conservative pay-out ratios, which ultimately means higher-quality distributions." The Canadian trusts that look most promising? The analyst is restricted in talking about Penngrowth Royalty Trust (Toronto: PGF.UN) because of a recent offering his firm led for that entity. However, he notes that historically, it has been a leader and one of the best-managed vehicles in the trust sector. Additionally, he has an Outperform on ARC Energy Trust (Toronto: AET.UN) and Freehold Royalty Trust (Toronto: FRU.UN). "We also like Athabasca Oil Sands Trust (Toronto: AOS.UN) and Canadian Oil Sands Trust (Toronto: CO.UN). These vehicles have a joint-venture interest in the Syncrude project, which is expected to double production and lower operating costs significantly by 2008." Are trusts a better buy for investors than Canadian producer stocks? Says Panarites, "If you were to compare the profitability of the exploration business to the profitability associated with low-risk production, you would come to the conclusion that while exploration has some sex appeal, it doesn't necessarily provide ongoing profitability-certainly not to the extent these trusts do."