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Historically, oil and gas has been a cyclical business, and no one rides that cycle up and down more than energy service stocks. When oil prices rise, volume picks up -- as does the service sector's pricing. When oil prices fall, business sours and overcapacity kills pricing. Investors have to be nimble, anticipating the peaks and troughs before it's too late.

Business trusts, on the other hand, were designed with more mundane, predictable enterprises in mind -- those that might be short on growth, but long on stability and cash generation. The idea was that investors would be drawn to stable monthly distributions, and low-tech businesses that were easy to understand.

So much for theory. In practice, one should never underestimate wily investment bankers, and their remarkable ability to reinvent capital markets. And thus it has come to pass that a growing number of energy service companies have been trusted, in the process evolving from small, unknown entities to highly popular income funds. Go figure!

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Case in point (and the first example I could find) -- Foremost Industries. In late 2001, Foremost was anything but foremost in the minds of investors. The stock had a minuscule market capitalization and hardly ever traded. To rectify the situation, the decision was made to convert to a trust. Interestingly, shareholders had the option of choosing new trust units, or $4 in cash. (I haven't seen that wrinkle since). Today, trading above $30 a unit, Foremost finally deserves its name.

The second conversion I found was Canadian Crude Separators (CCS), which "trusted" in May, 2002. Lower tax and greater liquidity were mentioned as deciding factors in making the switch. Since then, the monthly distribution has risen 70 per cent, and the unit price has quadrupled.

Next up was Cathedral Energy, which trusted in July, 2002. The units languished initially, but are up 2½ times since last year. A month later, it was conversion time for Wellco, an obscure Venture Exchange-listed penny stock. Adjusting for a one-for-10 reverse stock split, the unit price has subsequently doubled.

Later that month, Trinidad Drilling announced it was converting. I remember reading a short blurb about it in the newspaper and immediately started buying. The units-to-be sported a 16-per-cent yield, which I thought was pretty attractive -- even for a drilling rig company. Since then, the initial distribution has been raised 166 per cent, and the yield has dropped to 7 per cent. Calculate what kind of a price move that adds up to, and please don't ask me where I sold.

In early 2003, Newalta converted -- not totally unexpected given the company's similarity to the aforementioned CCS. Initially, the market didn't seem that impressed, but my partner Randall Abramson was, and he backed up the truck. Distributions have since been raised 40 per cent, and the units have almost tripled.

Finally, in 2004, two more energy service stocks have trusted -- Peak Energy and Badger Daylighting. Badger's conversion was announced in February, and the shares/units have doubled since. Peak is up a more modest 25 per cent.

The reason I am wasting all this ink on a little history lesson is because, whether or not you think these stocks make good income funds, it seems to me that when one of them does go the trust route, shareholders do quite well. So wouldn't it make a lot of sense to find the next candidate for trust conversion?

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I think so, and I'll even throw a name into the ring -- Pulse Data, proud owner of a large seismic data library and facing a growing tax bill in another year. The stock sells for $1.71 and, if converted, I can see the units trading closer to $2.

Martin Braun is the president of investment counsellor Strategic Advisors Corp. and manager of the Adaly Opportunity Fund. SAC and its affiliate, Strategic Capital Partners Inc., may have an interest in securities mentioned herein.

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