CONNACHER OIL AND GAS (T.CLL)

I've had it with the Canadian government's anti-capitalist rampage!

More than two years ago, we started recommending oil sands stocks as terrific alternative energy plays that allowed us to profit from a largely untapped resource from our neighbors to the north. Even though the oil sands story is still building, I can see writing on the wall that trouble is brewing again in Canada.

A proposed tax on oil sands production and a change in royalty structure has me thinking that it's time to close our positions in Connacher Oil and Gas (T.CLL) and UTS Energy Corp. (T.UTS).

Recently, Reuters reported that an expert panel appointed by Conservative Premier Ed Stelmach urged the government to change the fiscal regime. The panel argued that Albertans get a smaller share of oil and gas rewards, including oil sands development, than residents of most other major producing regions.

The panel made two recommendations in the report that I see as detrimental to our oil sands plays:

1) Higher royalties for oil sands projects once their development costs are paid out.

2) A new tax on oil sands production that is based on benchmark oil prices.

Furthermore, the panel suggested a cut in royalties for low-productivity conventional oil and gas wells and an increase for more prolific ones.

In a Reuters article, Jill Angevine, an analyst at FirstEnergy Capital Corp., estimated the changes to the royalty structure could cut oil sands projects' net present value by 7% to 10%. I think Ms. Angevine hit the nail on the head. That is exactly what is likely to happen.

Panel chairman Bill Hunter said making the changes would not harm Alberta's attractiveness as a place for energy investment. He must be off his rocker. These companies are already struggling to make ends meet thanks to the rising cost of labor and materials. Higher royalties and taxes are really going to hurt them.

Bottom Line: It's hard to make a case for these oil sands companies being valued for much more than $1 per barrel of recoverable reserves -- and both of these stocks are at that level.

If we get a big sell-off when the Alberta government responds to the study, we'll revisit these names.

Before any confusion arises, these proposals won't affect any of our Canadian energy trust plays because they deal in more conventional natural gas and oil operations. As I've emphasized over and over, oil sand are a different type of play and the operation is limited to the province of Alberta.

Most of our WaveRiders are eligible for long-term capital gains here, and the environment for oil sands investment just keeps getting worse.

Plus, the anti-capitalist Canadians have not yet come up with their carbon tax formula. I'm told to look for $5 a barrel, which would be another drag on the biz.

Although I was expecting much larger returns from our oil sands plays, I'm willing to take the current gains -- 88% in Connacher and 150% in UTS Energy -- and move on to greener pastures.