As we had discussed while on the roadshow, we were patient in terms of investing the proceeds of the offering. Thus, we were able to take advantage of lower trust prices when the price of oil fell. Oil has now tested its 200 day moving average twice and has bounced upward each time. Following the second test, the oil price moved decisively back to $48 per barrel and we decided to become more fully invested.

Cash levels are now down to only 8% and we expect to deploy the remainder in the coming week. Current holdings include 8.4% in oil service royalty trusts as well as 3.0% in oil and gas common equities. The remainder is invested in oil and gas royalty trusts. The current portfolio is comprised of 25 different holdings. We expect to add a few junior exploration companies that possess meaningful price appreciation potential in the near term. We are very pleased with the construction of the portfolio in terms of holdings and we are excited about its future prospects.

With respect to the market, the price of oil has been the real wild card of the quarter. Having traded as high as $55 per barrel, the price rapidly retreated to the $41-44 level. In our view, the higher prices for oil could not be sustained by the global economy and a decline was likely at some point. However, we were surprised by how quickly prices retreated, spurred on by warm weather in the Northeast and a small build in inventories. Longer term, this price decline is actually a positive, as lower oil prices will help to sustain global growth thereby ensuing continued higher levels of energy consumption. The global economy just received a tax break and the benefits to economic activity should be widespread.

We believe that the price of oil needs to trade in a sustained range of $38-42 per barrel in order to encourage new exploration and development. Any price substantially less will cause the global oil industry to retreat from exploration programs and energy markets will simply end up back in the same supply-constrained market that we have been experiencing. Years of underinvestment by the majors are a significant contributor to today’s higher prices.

Simply put, all the ‘easy’ oil has been found. Any meaningful amounts of new reserves will likely come from geographic areas that are challenging (i.e. Russia, Africa, Arctic regions) and involve much higher risk and costs. Without higher prices, the majors will simply not make the necessary investments having been ‘burned’ too many times in previous oil price cycles.

In terms of the Western Canadian industry, a price band of $38-42 per barrel will result in companies that are very, very profitable. The economics of producing oil and natural gas at these levels will result in corporate earnings and cash flow that exceed current expectations. Most common share and unit trust net asset valuations are currently discounting $30-32 per barrel so in our view, significant upside continues to exist in energy shares despite our long-standing overweight since October 2002.

With respect to unit trusts, the higher price band will assure current distribution levels (certain pay-outs may even increase) while adding confidence to the sustainability of the business model. Furthermore, we believe that there is a significant evolution underway in the Canadian oil and gas industry. In its early years, the royalty trust market was compromised of entities that were created solely for ‘financial engineering’ purposes by corporate finance departments. Payout rates were very high (90% or more) and the sustainability of the business model was questionable. However, in the last few years, as higher commodity prices resulted in a surge in profitability, operating oil and gas companies have turned to the royalty trust structure so as to become more tax efficient. Today, we have a large number of trusts that are run by seasoned, experienced oil and gas professionals that have pay-out rates in the 40%-70% level and possess a high percentage of property operatorship. As fundamental investors, this makes much more intuitive sense to us and we believe that many of these so-called hybrid trusts are sustainable for years to come. In an environment of subdued overall investment returns, yields of 11% to as high as 16% appear quite enticing. We would also note that legislation in Alberta and Ontario has been passed that eliminates unlimited liability. From a liability risk standpoint, trusts are now no different from common equity.

We would also highlight oil and gas service stocks as a major beneficiary of our pricing outlook. At $38-42 per barrel oil and $5.25/mcf gas, the industry will continue to re-invest in developing new reserves. We suspect the rig count will stay strong in Western Canada well into 2006. Accordingly, service companies stand to benefit handsomely from the industry’s new-found profitability. We believe, that with visibility into 2006, service stocks deserve to be accorded higher valuations.

To be sure, China’s growth and consumption of energy is pivotal to sustaining current prices. Chart A depicts the 10-year growth in Chinese oil imports. While China’s energy consumption may have hit a short term peak last September-October, we suspect that demand will continue to be robust putting on-going pressure on global markets. China’s desire to build a strategic petroleum reserve (SPR) will only add demand to the equation.

With 36 years of experience working in the energy field, Charlie Maxwell is considered to be the ‘dean’ of oil and gas analysts. We have personally known Charlie since 1987 and we hold him in the highest regard. In November of 2004, Charlie wrote an article for Barron’s that discusses the current state of energy markets. We have included his article as an appendix. It is an insightful piece and well worth reading.

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This report is intended for clients of Galileo Global Equity Advisors Inc. Galileo Global Equity Advisors Inc. invests on behalf of its clients in the issuers mentioned in this report. Employees of Galileo Global Equity Advisors Inc. may own shares. This document is not intended to sell or promote securities.

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