3/14/13: Steady Numbers in the Headwinds

By Roger Conrad • March 14, 2013

This week five more Canadian Edge Portfolio Holdings announced fourth-quarter and full-year 2012 numbers. Several faced significant headwinds in their markets. But all delivered and therefore remain solid positions and are buys below designated target prices.

The highlight came from Bird Construction Inc (TSX: BDT, OTC: BIRDF), which posted record earnings from its construction and engineering operations and raised its dividend by a solid 5.5 percent.

Bird Construction’s profit per share for the quarter covers the new payout by a better than 3-to-1 margin. The company also recorded backlog of CAD1.1 billion at quarter’s end, ensuring a solid start to 2013.

Looking ahead, the company will be challenged to replace contracts in the oil patch, which is being rattled by a reduction in drilling in Canada. But these results demonstrate it has the reach and resources to do so. Bird Construction remains a buy under USD14.50.

Fellow Conservative Holding Northern Property REIT (TSX: NPR-U, OTC: NPRUF) managed a payout ratio of 73.5 percent in the fourth quarter, traditionally one of its weakest due to apartment owners’ assumption of heating costs.

The company also overcame the headwind from the sale of its seniors housing properties, which it did to comply with tougher Canadian rules on qualifying as a real estate investment trust.

The sales have been completed at good prices. But they have left a big wad of cash on the balance sheet to invest in order to generate returns.

Northern Property made good progress in this area, investing CAD125 million in 2012 in addition to CAD50 million in development projects. And it’s brought debt-to-book value down to 41 percent. As a result, the shortfall should be significantly less going forward.

In the meantime, these numbers confirm this REIT is a solid investment. Buy Northern Property up to USD32 if you don’t already own it.

Turning to the Aggressive Holdings, Crescent Point Energy Corp (TSX: CPG, OTC: CPGXF) reported an 11 percent drop in its funds from operations per share. That, however, was entirely due to a 26 percent increase in shares outstanding during the year to finance growth.

The investments new equity raisings funded, including the purchase of the Ute Energy Upstream Holdings LLC properties in the US in late year, are now adding to cash flows, which should ensure the dilution is more than wiped out in 2013. Fourth-quarter output rose 8 percent over last year, and full-year production was up 33 percent. Oil was again more than 90 percent of the total, with overall exit production hitting 108,007 barrels of oil equivalent a day.

The company saw a 13 percent drop in realized selling prices for oil and other liquids and a 3 percent decline for gas. The culprit was differentials, but the damage was far less than for many producers, demonstrating Crescent Point’s prime location.

Net debt rose to 44 percent. Yet the company still held debt-to-cash flow to just a 1-to-1 ratio. The payout ratio for the quarter was 58 percent, basically identical to the 57 percent full-year ratio.

These are solid numbers at a time that’s been so challenging for other companies, and they’re more reason why I consider this stock one of my core four Canadian producers for all environments. The others are ARC Resources Ltd (TSX: ARX, OTC: AETUF), Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) and Vermilion Energy Inc (TSX: VET, OTC: VEMTF).

Crescent Point is a buy up to USD48 for those who don’t already own it.

When this earnings season began, I had a bit of trepidation about the dividend at PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF). Fortunately, the results were plenty robust to set my mind at ease.

Management affirmed its expectation for 8 percent to 12 percent production growth for 2013, despite curtailing capital spending. It also stated that operating cash flow would cover cash dividends and CAPEX with room to spare under conservative estimates for oil prices and price differentials, which it’s beating handily thus far in 2013.

The actual payout ratio for the quarter was about 30 percent but just 16 percent including the impact of the dividend reinvestment plan and dividends taken in stock. That’s a very light call on actual cash for dividends, and it should leave money available to bring down leverage in 2013.

Production during the fourth quarter was up 23 percent from last year, and the company continued to benefit from scale and reach by reducing decline rates. The Cardium properties emerged as a primary source of growth, and the company’s Duvernay properties have gained value as well on drilling success.

During PetroBakken’s fourth-quarter conference call management entertained many questions on the dividend, including some from investors who wondered if the company shouldn’t just cut anyway to reinvest capital or to cut debt.

Each time management answered by affirming there was enough cash to meet company goals, that market sentiment that “something is wrong” is simply dead wrong and that it has no intention of doing anything but maintaining the dividend.

At least some of that may have sunk in to investors this week, as the stock has ticked up a bit.  PetroBakken is still the most leveraged to energy markets among Portfolio producers.

I never advocate averaging down as a strategy, but PetroBakken is still a buy up to USD14 for those who don’t already own it.

If there was one company that really encountered big headwinds last year, it was Ag Growth International Inc (TSX: AFN, OTC: AGGRF). The challenge was a 13 percent drop in the US corn crop, which slashed demand for its core grain-handling equipment.

That shouldn’t be nearly the same challenge in 2013, given the current forecast for a 35 percent increase in the corn crop. But in the meantime the company still showed strong growth at its overseas operation–expected to be 30 percent of sales in 2014–as well as in Canada.

Debt-to-cash flow is just 0.5-to-1, meaning it’s not a factor in considering dividend policy. And management stated several times during the company’s fourth-quarter conference call that it wouldn’t consider doing anything to the dividend based on weather factors such as the US drought last year.

Earnings were negative in the fourth quarter. Should they stay there in 2013, we would have to re-evaluate this stock. But results were very much in line with previous guidance as well as Bay Street expectations, and the prognosis is good for the rest of the year as well.

Ag Growth is not for the most conservative investors but it is a buy up to USD40 for anyone who hasn’t already bought in.

The Rest of the Stories

Here’s where to find my analysis of Canadian Edge Portfolio Holdings’ fourth-quarter and full-year 2012 earnings. I’ll have Flash Alerts covering those that haven’t yet reported shortly after they post numbers and host conference calls.

Conservative Holdings

Aggressive Holdings

Stock Talk

Comments Guidelines
Jeff Smith

Jeff Smith

Hi Roger–je acts like there s something going on tht Im not aware of.Any thoughts??
thx,
Jeff

Investing Daily Service

Investing Daily Service

Hi Jeff:

Roger has not changed his position on Just Energy since he recommended it as a Best Buy in
the February issue of Canadian Edge. He still feels that it is a buy @11. To stay aware of any updates
or changes in his recommendations, Roger recommends reading the weekly Maple Leaf Memo updates on Tuesdays and look for Flash Alert emails as well.

Robert C Wood

Robert C Wood

Roger, Due to the recent scary cuts in the dividends for JE and AT that certainly caught me ( a long time subscriber)
by surprise please consider putting a column in your Conservative and Aggressive Portfolios labeled DIVIDEND
SECURITY. Then you could turn that rating down whenever you suspected a likely dividend cut and it would be
easily available to all readers under your Portfolio heading key. For room in the columns you could remove the
dividend in dollars column as we all easily convert that from your Yield percentage and Price columns.
Thank you for your good newsletter. Robert C. Wood, Billings, Mt.

Thomas Mccauley

Thomas Mccauley

I wish Roger would better ‘update’ APT.

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