CALGARY - The broader market is off 17% this year, so investors enjoying fat, double-digit yields offered by oil and gas income trusts can be forgiven for paying scant attention to the cries of "caveat emptor" coming from the non-believers.

Still, for depleting resource trusts such as those in the oilpatch, listening to a few words of caution now could save some heartache down the road.

In a recent research report downgrading oil and gas trusts to "underweight" from "market weight," Roger Serin, an analyst at Raymond James Ltd. in Calgary, laid out a list of factors that could bite the sector in the next year.

"While we may be early with this call, we expect unit prices in the trust sector to weaken noticeably over the next six to 12 months," the Raymond James analyst told clients.

Among the concerns highlighted by the analyst is a trust's ability to sustain distributions, the foundation of its appeal as an investment vehicle.

The inescapable reality for any oil and gas company operating in the maturing western Canadian basin is that production from a well will, on average, decline at a rate of 20% or more each year.

For traditional oil and gas companies striving to show production growth to investors, the never-ending battle against decline rates is one thing. But for income trusts, the decline battle is even more important.

Trusts pay out between 75% and 95% of cash flow to unitholders, rather than plowing it back into the ground as do exploration and production outfits, so decline rates take on a greater significance.

As trusts continue to proliferate in what is already a highly competitive basin, finding assets with long life reserves and low decline rates will become more of a challenge. As Mr. Serin noted, the quality of assets going into trusts has already started to erode, an ominous reality for the sector.

The average trust needs to spend between $20,000 and $30,000 to replace each barrel of oil equivalent a day lost through declines. The higher the decline rate, the more cash that needs to be spent to offset production declines, and the less money a trust has to pay out to unitholders.

And if commodity prices crack from their current high levels, sustaining distributions becomes even more challenging.

Throw in a rising interest rate environment that would make other less risky income-oriented investment vehicles more attractive -- thereby limiting a trust's ability to raise the capital necessary to offset reserve declines -- and the bloom could start to come off the rose in a hurry.

Still, if the recent action in the oil and gas trust sector is any indication, those concerns aren't yet uppermost in the thoughts of many investors.

While the most recent figures compiled by CIBC World Markets show oil and gas trusts had an off month -- reflecting in part an 11% dip in oil prices on the easing of war concerns in the Middle East -- trusts, apparently, still hold the keys to the capital markets.

Pengrowth Energy Trust said yesterday the underwriters for its latest offering will exercise their overallotment option, bumping the value of the offering to $281.8-million.

PrimeWest Energy Trust also found bankers receptive to its cash needs, agreeing to a bought deal that will raise $110-million. PrimeWest also plans to list its units on the New York Stock Exchange on Nov. 19.

Vermilion Resources Ltd., one of the precious few mid-sized companies left in the Canadian sector, decided this month to take the bulk of its 26,000 barrels of production and become an income trust. Vermilion, which will become Canada's 19th oil & gas trust, saw its stock rise 46% on the news.