Solid Stocks for Uncertain Times

By Roger Conrad • November 9, 2012 • Portfolio Update

So far in 2012 Canadian Edge Portfolio Holdings have returned about 8 percent in US dollar terms, including dividends.

Whether the Portfolio finishes the year in better or worse shape depends on two factors: Whether or not Washington reaches a compromise and avoids a fiscal cliff, and whether Portfolio companies continue to perform well as businesses.

My forecast remains for US lawmakers to reach a compromise, which in turn will dramatically bolster confidence in investments considered linked to global growth. That definitely includes the Canadian dollar and Canadian stocks, which are priced in and pay dividends in Canadian dollars.

For US investors, that means our current Canadian Edge Portfolio year-to-date returns could quickly double or even triple–just as they did at the end of 2011. That means even fatter returns for Conservative Holdings. And it will turn red to black for now lagging Aggressive Holdings, as investors revalue resource producers and other economically sensitive stocks higher.

Conversely, failure to avert a fiscal cliff could take Aggressive Holdings down hard from here and cut into the returns of Conservative Holdings. That could push the overall Portfolio into the red for the first year since 2008.

One way to protect your Canadian stocks from fiscal cliff risk is to sell short the two New York Stock Exchange-listed exchange traded funds (ETF) tracked in How They Rate that represent broad indexes. CurrencyShares Canadian Dollar Trust (NYSE: FXC) follows the fortunes of the Canadian dollar-US dollar exchange rate. iShares MSCI Canada Index Fund (NYSE: EWC), follows the Morgan Stanley Capital International Canada Index.

Shorting CurrencyShares Canadian Dollar will offset a retreat by the loonie. A short on iShares MSCI Canada would gain from a slide in a broad basket of Canadian stocks. The ETF’s top 10 holdings are major banks and resource companies, with no Canadian Edge Portfolio picks among them.

In my view, most of us are going to be much better just sitting tight with positions in strong Canadian companies–and waiting out whatever wild emotional swings we see in the market as Washington deliberates.

Even during the 2008-09 crash, stocks of companies that held it together as underlying businesses kept paying dividends. And they eventually recovered losses when conditions improved.

Moreover, there’s just not enough leverage out there to ignite a global conflagration of anything close to that magnitude.

Rather, the worst-case scenario is continued erosion in share prices until even the most thick-headed in the US Congress finally do make a deal. And that means strong companies will recover damage now even faster than they did in 2009-10.

The key is for companies’ numbers to continue supporting balance sheet strength and dividends, as well as management guidance and plans for growth.

The good news so far is that’s still happening for Portfolio companies reporting third-quarter results so far. That includes Atlantic Power Corp (TSX: ATP, NYSE: AT), the shares of which took a spill following its earnings release on Nov. 6.

I discussed the Atlantic Power situation–and my reasons for keeping it in the Portfolio–in a Nov. 7 Flash Alert. I have since had an opportunity to speak with CEO Barry Welch and CFO Terrence Ronan and am satisfied that despite the dip in the stock, a rise in the target payout ratio for 2012 and the largely negative reaction on Bay Street they were not warning on their dividend.

The projected drop in cash flow from the two Florida power plants starting in mid-2013 does present a challenge. Management will have to execute on its current lineup of projects–including a 300 megawatt wind plant in Oklahoma nearing start-up–as well as find new ones to maintain and grow dividends in coming years.

This, however, is a challenge they’ve been aware of for some years. Diversifying cash flow beyond these plants was a major reason for the Capital Power LP merger last year as well as the company’s move into renewable energy under long-term contracts this year. And a known risk is far easier to prepare for than an unknown risk.

No one should ever load up on any one company, including Atlantic Power. And I’m wholly opposed to the idea of averaging down, no matter how attractive a position looks. I’m also concerned less cash flow form Florida will make it more difficult for Atlantic to raise dividends in the near term, and I’m cutting the buy target to USD14 because of it.

But I’m satisfied enough that the company’s still on the right track and am sticking with this long-held position for now. Atlantic Power is a buy under USD14.

Pengrowth Energy Corp (TSX: PGF, NYSE: PGH) is another company reporting earlier that’s been the target of selling.

The company’s third-quarter numbers lived up to expectations for production and covered the distribution comfortably.

But concerns appear to have grown that lower oil prices will have a negative impact on future returns and threaten the dividend.

That, in my view, is unlikely unless energy prices go a lot lower.

For one thing, since announcing earnings the company has made another key acquisition, buying 650 barrels of oil equivalent per day of light oil output in the Alberta Cardium trend.

The property has substantial opportunity for new drilling and also consolidates the company’s existing holdings in the area.

The company also committed an additional CAD55 million for developing its Lindbergh oil sands property.

Spending capital is almost always a sign of strength, not weakness. If anyone is really concerned about energy prices, they should definitely take a look at other CE picks, if not dodge the sector entirely.

But in a diversified and balanced portfolio, there’s definitely room for an aggressive stock such as Pengrowth. Buy up to USD7.

Below I look at all the companies reporting results since my last Flash Alert. The good news is the numbers are positive pretty much around the horn, even more for commodity price-sensitive fare.

These companies may not pass the test in future quarters. That’s why we’ve got to look at them every time they post numbers. But for now they do, and they’re worth keeping even if the macro picture gets a lot murkier.

Note that Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) and RioCan REIT (TSX: REI-U, OTC: RIOCF) are highlighted in this month’s Best Buys feature.

Conservative Holdings: Well Protected But Expensive

There are still a few Conservative Holdings yet to report third-quarter numbers. But all those discussed below are doing their job of producing reliable revenue and practicing conservative financial principles.

For the most part their strength has been noticed and rewarded by investors, and the majority has produced steady if not robust returns this year. This, ironically, has made high investor expectations a considerable risk to share prices for many of them. And I continue to be stingy raising buy targets for that reason, even when the market seems all too willing to pay more.

Prices of some have retreated a bit, opening up value where we haven’t seen it for a while. And if worry about the global economy continues to grow we’ll no doubt see prices retreat further.

Others have raised dividends and thereby earned boosts in buy targets, for example Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF). Davis + Henderson is now a buy up to USD21 thanks to a 3.1 percent dividend increase.

But until either prices retreat or dividends rise, discretion is the better part of valor, even for such high-quality companies. Don’t forget a drop in the Canadian dollar alone can cause US dollar prices to back off, and the loonie’s pattern has definitely been retreat when global investors have rushed for the safety of US Treasuries.

Artis REIT (TSX: AX-U, OTC: ARESF) posted a 9.1 percent boost in third-quarter funds from operations per share, its primary gauge of profitability.

The headline number reflected accretive additions of property, adding 25.6 percent to revenue. And management achieved that expansion while reducing debt leverage to 48 percent of book value, down from 50.7 percent at the beginning of the year. Artis’ payout ratio dipped to 81.8 percent from 87.1 percent, while the nine-month payout ratio came down to 84.4 percent from 92 percent in 2011.

Management continues to have success renewing leases at higher rates and expects to re-lease at higher rents the 15.8 percent of the portfolio up for renewal by the end of 2013.

Current market rents are 6.5 percent above rents on expiring leases. Portfolio occupancy, meanwhile, increased to 95.3 percent during the third quarter, up from 94.6 percent on Jun. 30, 2012.

Artis has hinted it would consider a distribution increase if results justified it. These numbers may not push it over the top, but they’re certainly a step in the right direction.

My advice is still to buy Artis REIT on dips to USD16 if you haven’t yet.

Brookfield Renewable Power Energy Partners LP (TSX: BEP-U, OTC: BRPFF) results for 2012 have been “well below expectations due to unfavourable hydrological conditions,” states CEO Richard Legault.

Third-quarter revenue dipped 26.3 percent, and funds from operations (FFO) per unit–the primary measure of profits–fell to just CAD0.04 . Nine-month FFO per unit of CAD1.04 per unit covered the dividend by about a 1-to-1 ratio, or a payout ratio of 99.5 percent.

The power company did, however, add 600 megawatts of wind and water generating capacity, laying the groundwork for cash flow and distribution growth when weather conditions inevitably become more conducive to profitability. Note that weather variation’s potential impact on profit is far less than in the past, as the hydro assets in Brazil and the US are protected from changing water flows by dams and rate structures.

The bottom line is there’s nothing in these numbers to suggest a change in Brookfield Renewable’s strategy of adding assets and raising dividends when the cash flows justify it.

The stock is off slightly since the earnings announcement. But investors should still wait for my target of USD27 to buy Brookfield Renewable, which is still a bit pricey as of this writing.

Canadian Apartment Properties REIT’s (TSX: CAR, OTC: CDPYF) third-quarter revenue surged 17.6 percent, and net operating income margin rose to 60.3 percent from last year’s 59.3 percent.

Normalized funds from operations per unit surged 12.1 percent, and the payout ratio fell to just 65.3 percent from 72 percent a year ago. Average monthly rents rose 1.8 percent, and occupancy stayed solid at 98.2 percent.

Management continued to demonstrate its skill disposing of non-core properties profitably, while adding others that provided an immediate positive impact on the bottom line. And there’s more on tap as we head into 2013, as the company enjoys some of the lowest financing costs in its history.

All of this is solid confirmation of the apartment owner’s strategy of ultra-conservative expansion, which has now re-started dividend growth as well. My only problem remains price, as the units still trade well above my buy target of USD22. I’ll raise that again when there’s another dividend increase.

For now, however, Canadian Apartment Properties REIT is a buy on dips to USD22.

Cineplex Inc (TSX: CGX, OTC: CPXGF) posted another steady quarter in the absence of a compelling movie lineup.

Third-quarter revenue rose 1.7 percent despite a 1 percent dip in attendance from year-earlier levels. Cash flow margins dipped 1.4 percentage points but were still impressive at 19.4 percent, as the company added new services and products as well as theaters in several key locations. UltraAVX and IMAX accounted for 31.4 percent of the business during the quarter.

Basic earnings doubled, though free cash flow–the primary metric for dividends–was 19.6 percent lower in part due to higher capital spending.

Despite that, Cineplex’ payout ratio was steady at 58.8 percent, keeping the company on track for another sizeable dividend boost next year. Until then our buy target for Cineplex remains USD30 or lower.

Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) increased its dividend to an annual rate of CAD1.28 per share, a 3.2 percent boost that was in line with last year’s hike. That move was firmly backed up by very steady third-quarter 2012 results.

Revenue ticked up 3 percent, as the company successfully integrated new assets acquired in the US. Lending technology services boosted their share of revenue to 16 percent, a positive sign for future sales growth. That’s offsetting some of the impact of tighter mortgage lending rules in Canada designed to cool off the country’s property market.

Overall cash flow rose 3.8 percent, and margins increased to 25 percent of revenue, reflecting efficiency in the organization as well as reliance on higher-margin services and US expansion. Management is counting on US growth in particular to offset any reduced activity in Canada.

Excluding one-time items Davis + Henderson’s overall net income rose 7.3 percent to CAD0.4752 per share. That’s a payout ratio of 67.3 percent based on the new dividend rate of CAD0.32 per share per quarter, solid insulation against any business setbacks and low enough to keep the business growing.

It’s also enough to earn Davis + Henderson a boost in my buy target to USD21.

Dundee REIT (TSX: D-U, OTC: DRETF) raised its adjusted funds from operations (AFFO)–the key account for funding distributions–by 5 percent in its third quarter.

That reflects a solid 1.6 percent gain in net operating income from the office properties it’s held for more than one year, backed by strong 95.1 percent occupancy rate and rent growth.

The latter should remain robust going forward, as Dundee’s average in-place rents are 12 percent below current market rents.

The initial public offering and partial sale of the REIT’s industrial properties portfolio and debt refinancings should push down interest costs in the coming year as well.

Based on AFFO the payout ratio came in at about 90 percent, flat with the year-earlier tally. That’s still high, but during Dundee’s third-quarter conference call CEO Michael Cooper stated the REIT “will have opportunity to begin to increase our distributions in 2013.”

That’s very positive and I’ll raise the buy target when we see it. Until then Dundee REIT is a buy on any dip to USD36 or lower.

EnerCare Inc (TSX: ECI, OTC: CSUWF) reported its strongest customer retention rate since 2008 at its core waterheater rental business. That keyed a solid quarter in which revenue rose 5.9 percent and cash flow generally held steady.

Submetering revenue, meanwhile, continued its robust growth, rising 25.7 percent from year-earlier levels.

The payout ratio ticked up to 61 percent from 50 percent in 2011 due to a higher rate of dividend and increased taxes. But given the progress in the core business sales, long-run expense control measures and a 12.5 percent cut in interest expense, EnerCare appears on track to keep dividends growing into 2013 and beyond.

A private capital firm is still pushing a sale of the company to the highest bidder. If it succeeds we could realize a windfall gain with the stock. If not our gains will come more slowly from what’s shaping up as a very solid wealth builder.

EnerCare is a buy up to USD10 for those who don’t have positions.

Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF) saw generation at its hydro and wind power plants slip 15 percent from 2011’s record level, back to levels more typical of historical averages. That pushed down revenue and cash flow 6 percent and 8 percent, respectively.

Nine-month cash flow excluding one-time items, however, was still up 14.1 percent from last year’s level.

More important, Innergex continued to make progress with its development projects, the ultimate drivers of cash flow growth. The Kwoiek Creek Hydro plant is still set to enter operations in the fourth quarter of 2013. The Northwest Stave River project is also expected to start generating power then, which should give cash flow a sharp lift.

Companies like Innergex expense construction costs up front and realize the returns from long-term contracts once the power starts to flow. Innergex also has a couple of acquisitions in the works, which could start contributing even earlier.

There is uncertainty in some provinces, notably Quebec, about future renewable energy incentives. In a worst-case this uncertainty could reduce management’s options for new projects and future growth. But with a healthy pipeline and access to low-cost capital–despite the fact that DBRS dropped coverage of the company–there’s still plenty of money to be made from the current pipeline, with future revenue secured by long-term contracts.

And Innergex continues to follow very conservative financial policies, including lining up all financing before making any moves.

My forecast is still for a return to dividend growth the next few years. Until that happens, however, my buy target remains USD10 for those who don’t already own Innergex.

Just Energy Group Inc (TSX: JE, NYSE: JE) has again disappointed short sellers by posting strong numbers for its fiscal 2013 second quarter (ended Sept. 30, 2012).

Revenue and gross margin per share rose 15.3 percent and 14.2 percent, respectively, while the payout ratio based on cash flow excluding growth capital expenditures ticked down to 90 percent from 91 percent a year earlier. The six-month ratio–probably a more important gauge–was 61 percent versus the prior year’s 62 percent. The 12-month payout ratio on that same basis is also 61 percent.

The company saw an 18.2 percent jump in energy customers and an 18.7 percent jump in total customers from last year, crossing the 4.2 million mark for the first time. Customer additions for the three months also hit a record, with the pace rising 45 percent from last year.

CEO Ken Hartwick states the company is “progressing” toward the “aggressive targets” it set for the current fiscal year. The current strategy includes both gaining and holding electricity and gas customers as well as up-selling them to new products and services such as energy control and green energy.

The company’s attrition rate rose slightly in the US, due to the loss of what it called a “very low margin US gas customer.” Just Energy didn’t pursue renewal but still saw overall renewal rates rise to 70 percent from 67 percent last year. Bad debt also fell to 2.3 percent of sales from 2.5 percent last year.

Finally, “embedded margin”–management’s primary measure of profitability–was up 15 percent, vindicating Just Energy’s strategy and pointing to further growth ahead.

I don’t expect dividend growth at this company any time soon. But the bottom line is these numbers do verify dividend strength, which is remarkable for any company with a current yield north of 12 percent.

Just Energy is still a buy under USD16 for those who don’t already have positions.

Keyera Corp (TSX: KEY, OTC: KEYUF) increased its dividend by 5.9 percent and then backed the boost with solid third-quarter results.

The company’s gathering and processing business had slightly lower margins. But that was more than made up for by a 78 percent jump in profit from the NGL Infrastructure segment, which continues to benefit from signing new long-term, fee-based contracts with natural gas liquids producers.

Marketing margin was weaker by nearly half, due to softer propane margins and hedge contract settlements. Quarterly distributable cash flow dipped to CAD0.24 per share due to scheduled maintenance turnarounds. That pushed Keyera’s payout ratio skyward to 210 percent.

That will reverse in coming quarters, however, and in any case the nine-month payout ratio was still moderate at 92 percent.

Growth capital spending remains the primary driver of future earnings, with most of the effort focused on new fee-generating energy midstream assets. Third-quarter spending of CAD34.1 million–57.6 percent over last year’s tally–was very encouraging in that regard. That promises more consistent dividend growth and a rising share price in 2013, though the stock currently trades well above my buy target of USD42.

Those with big profits and over-weighted positions in Keyera may want to take some money off the table to restore balance.

Northern Property REIT (TSX: NPR, OTC: NPRUF) posted solid third-quarter results as it looks to reinvest funds from the recent sale of its seniors housing portfolio.

Revenue was 1.4 percent lower than a year ago, while net operating income was off by about 9 percent. Funds from operations, however, still covered the distribution comfortably, with a payout ratio of 68.9 percent for the quarter and 65.6 percent for the first nine months of 2012.

The REIT’s unitholders will get a bonus in the form of a special distribution of CAD0.45 to CAD0.55 per share, which is related to taxable income from the sale of the seniors’ portfolio. Details will be released over “the next few weeks,” according to management.

Occupancy was up slightly to 95.3 percent, and the REIT increased its development capacity as well, with 460 residential units and 30,900 square feet of office and industrial property now in progress. Debt-to-gross book value fell to 38.6 percent from 47.8 percent a year ago.

The bottom line is I’m not raising my buy target until there’s an increase in the continuing distribution. Buy Northern Property on dips to USD30 or lower.

Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) came in with slightly lower third-quarter adjusted cash flow from operating activities. But its primary measure of profitability nonetheless covered the payout comfortably, with an 88 percent ratio.

That reflects both the successful integration of new fee-generating assets and an ongoing reduction of the commodity-price exposure inherited with the acquisition of the former Provident Energy Ltd.

Pembina also continued to finance its activities with low-cost capital, issuing 10-year notes at a coupon rate of just 3.77 percent. And it won regulatory approval for several asset expansions, adding to an already solid CAD4 billion pipeline for growth capital spending now in the works.

Looking ahead, increased size also means enhanced ability to do new projects. The company stands to gain still more business from its presence in Alberta’s oil sands, particularly if the Keystone XL pipeline is constructed as expected.

Revenue from tar sands infrastructure rose 19 percent year over year due to asset additions. Coupled with similar growth in light oil and gas liquids infrastructure, that’s fuel for Pembina’s annual dividend growth target of 3 percent to 5 percent.

Pembina Pipeline is a buy for even the most conservative investors up to my target of USD30.

Student Transportation Inc (TSX: STB, NSDQ: STB) posted fiscal 2013 first-quarter numbers “in line with our internal expectations,” according to CFO Patrick Walker.

The period, which includes mostly summer months when school isn’t in session, is usually seasonally weak. And this year’s results included offseason costs from contracts and acquisitions secured last year as well, reflected in a slightly higher cash flow loss than last year.

Revenue growth of 20.5 percent, however, was actually higher than the 15 percent guidance management has established with respect to business growth. Net loss for the quarter was actually a bit better, thanks to gains on currency hedges, though these tend to even out over time.

The company also appears to have worked through the fallout from Hurricane Sandy, which triggered extended school closings, particularly in New Jersey. And it continued to make progress retiring higher-cost debt to boost its balance sheet.

We’ll know more about Student’s results when we get into the more profitable second and third quarters. But with no real surprises in these numbers, the company looks solid and the dividend safe.

Student Transportation remains a buy up to USD7.

Aggressive Holdings: Greater Exposure but Better Value

As a group Aggressive Holdings faced somewhat more difficult third-quarter conditions than Conservative Holdings, owing to their greater exposure to commodity-price swings and economic ups and downs.

But our picks still turned in numbers that supported management’s guidance–and therefore balance sheets and dividends.

Among our Holdings these stocks are most vulnerable to a real global economic crisis. And that risk has been reflected in relatively weak share-price performance by several of them for much of 2012.

On the other hand, if US politicians can get their act together and hammer out a compromise this is the group that will benefit the most from the faster North American growth that should follow. Their ability to profit from improving conditions and their demonstrated resiliency when conditions toughen are two good reasons why they belong in the portfolios of all but the most conservative investors.

Here’s the recap of companies reporting since my last Flash Alert.

ARC Resources Ltd (TSX: ARX, OTC: AETUF) announced a sharp drop in third-quarter funds from operations per share but still covered its dividend with a solid 54.5 percent payout ratio.

Production was strong at 89,511 barrels of oil equivalent per day, with oil output surging 18.1 percent and condensate rising 15.7 percent. That was partly offset by flat production of natural gas liquids and natural gas, producing an overall output gain of 5.1 percent. That’s somewhat less than in prior quarters and reflects management’s more conservative operating strategy in an environment of softer energy prices.

Realized selling prices for crude oil, for example, slipped 5.3 percent from year-earlier levels, while gas prices backed off 36.9 percent. Operating costs were steady at CAD10.64 per barrel of oil equivalent, while the company benefitted from lower royalties due the Crown.

The results demonstrate the success of the company’s shale drilling efforts, which are now much more focused on liquids.

That’s likely to remain the case in coming months, even as the company tries to use higher gas prices to lock in profitability for that fuel, which still accounts for nearly two-thirds of total output.

ARC has proven repeatedly that it’s built conservatively enough to stick to its strategy even in tough conditions.

And barring a really sharp setback in energy prices the shares and dividends should be able to hold steady.

The company also announced the retirement of long-time CEO John Dielwart in favor of the current Chief Operating Officer Myron Stadnyk. That’s the surest sign of stability at the top for this producer of oil and gas.

ARC Resources is still a buy up to USD26 for those who don’t already own it.

Extendicare REIT (TSX: EXE, OTC: EXETF) posted another round of results that reflected the cut in Medicare Part A and Managed Care rates, which were down 10.6 percent and 5.1 percent, respectively, from last year. Average daily revenue in both categories, however, was up 2.4 percent and 0.9 percent, respectively, over the second quarter.

Cash flow margins were also sequentially improved at 9.7 percent of sales versus 9.4 percent in the second quarter. And cash flow margins in Canada were even stronger at 11 percent, up from 9.4 percent a year ago and 10.7 percent in the second quarter 2012.

The payout ratio for the first nine months of 2012 was 93 percent of adjusted funds from operations, or 72 percent excluding reserves taken to shore up the balance sheet.

One way Extendicare has boosted its bottom line is refinancing debt to slash interest costs. And it’s reduced operating risk by limiting liability in regions with erratic regulation, such as Kentucky.

The big question now is if future moves to reduce costs and grow business in Canada will be able to offset 2013’s challenges to maintain balance-sheet strength and the dividend.

One development of particular interest involves US federal budget negotiations, which if not successful will trigger another 2 percent across-the-board cut in Medicare. Management is planning for such an eventuality, but the company would fare better if such a fiscal cliff is averted.

During the company’s third-quarter conference call CEO Tim Lukenda stated the company has “been preparing for Obamacare” for some time, in part because of a trend “evolving towards more coordinated care.” That’s the kind of far-sighted policymaking that’s allowed management to hold its dividend to date.

Mr. Lukenda also stated his belief during the call that “the current level of dividends is affordable,” though with the caveat that the board has ultimate responsibility for that. Management affirmed its comfort level in terms of debt leverage and that 2013 debt has now been refinanced.

This is an Aggressive Holding for a very good reason: There’s considerable uncertainty about US Medicare payments going forward.

These numbers and guidance, however, continue to support the current level of dividend. Aggressive investors without positions already can buy Extendicare up to USD9.

Newalta Corp (TSX: NAL, OTC: NWLTF) picked up 4 percent more revenue in the third quarter against year-earlier totals. Gross profit rose to 26 percent of revenue, reflecting greater efficiencies in the organization. And funds from operations ticked up 1 percent to CAD0.86 a share, good for an 11.6 percent payout ratio.

Growth capital expenditures–the fuel for future cash flow and dividend increases–were lower by 11 percent but still robust at CAD20.7 million.

CEO Al Cadotte noted improvements in all of the company’s “growth” markets, with special attention to the US and Alberta heavy oil. As a result Newalta will begin reporting three business units rather than the current two: New Markets (heavy oil, US), Oilfield (Canada energy patch environmental services) and Industrial (recycled waste products and site cleanup).

The company has set a target for a 23 percent increase in 2013 capital spending over 2012, half weighted toward New Markets.

Unlike when it was an income trust, Newalta’s value driver is future earnings growth, not necessarily dividends. These results demonstrate the long-term franchise-building strategy is on track, though there are challenges in some areas that could worsen if the global economy continues to slow.

Trading below my target of USD15, Newalta is still a great long-term bet for patient, risk-tolerant investors.

Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) posted a 41 percent boost in third-quarter cash flow despite a percentage-point drop in fuel volumes over last year.

The lower throughput was due to planned closures at the company’s Cango network, which cut retail volumes by 10 million liters.

The company was helped by strong refining margins throughout the quarter as well as new business and a 34 percent drop in net unit operating costs as it continues to implement its efficiency plans. Finance costs were slashed by 48 percent, as cash flow was deployed to pay down debt.

Distributable cash flow per share was 20 percent lower in the quarter due to the disposal of long-haul trucking assets last year. But it still covered the dividend comfortably, with a payout ratio of 38 percent. The payout ratio for the first nine months of 2012 was 46 percent, up slightly from last year’s 44 percent.

The company also earned a return on capital employed of 23.9 percent, up from 12.8 percent last year, again thanks to continued efficiency measures.

Management also affirmed its five-year strategic plan to double 2011 normalized cash flow by the end of 2016 with a mix of acquisitions and higher margins. That should provide more than enough cash flow for dividend growth to resume, though the priority will probably be on debt reduction for the time being.

Until there is a dividend increase I’m holding the buy target for Parkland Fuel at USD13.

PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF) as a company continues to outperform the stock it replaced in the Aggressive Holdings, Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE), by a wide margin.

That’s not been reflected in its share price so far, in part because of the complex relationship between the company and former parent Petrobank Energy & Resources Ltd (TSX: PBG, OTC: PBEGF). But with the companies announcing a restructuring/separation, that should be less of a factor in share price performance going forward.

Meanwhile, the oil-focused producer now routinely meets its production guidance, hitting 45,000 barrels of oil equivalent per day in early November, with 53 wells in inventory waiting to be brought on stream. The company is accelerating a portion of anticipated first-quarter 2013 capital expenditures into this year to speed up development and now anticipates spending CAD975 million or CD340 million net of asset dispositions for all of this year.

Third-quarter output was relatively flat over year-earlier levels, due mainly to asset dispositions. Funds from operations were 20 percent lower than in 2011 at CAD0.65 per share. They were still good enough, however, to hold the payout ratio at 36.9 percent. Production costs were 7 percent lower per barrel of oil equivalent, which helped offset a 12 percent drop in realized selling prices.

No energy producer is unaffected by volatility in commodity prices. But with a full inventory of development and at last on target to meet operating targets, PetroBakken is an excellent high-yielding way to play the sector. My buy target remains up to USD18.

Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) increased its production of oil, natural gas and natural gas liquids per share by 18 percent in the third quarter. That plus low total cash costs of just a dollar per thousand cubic foot equivalent of gas (CAD6 per barrel of oil equivalent) helped keep funds from operations steady despite a 31 percent and a 12 percent decline in its realized selling prices for natural gas and liquids, respectively.

Operating costs remained at just CAD2.09 per barrel of oil equivalent, the lowest of any company we track in How They Rate by a wide margin. The company also made record capital investments of CAD317 million, as it continues to add new, ultra low-cost production. The payout ratio was just 33 percent of funds from operations.

Looking ahead, Peyto has considerable opportunities for development, including the Open Range Energy Corp properties acquired earlier this year. And management is still driving costs lower with efficiency measures.

My expectation for North American natural gas prices is that upside is limited to the USD4 to USD5 per million British thermal units range. But Peyto is the one gas-focused play that can make money even at selling prices a third of gas’s current spot price.

Peyto is a bit expensive now but very much a buy on any dip to USD20 or lower.

Wajax Corp (TSX: WJX, OTC: WJXFF) posted revenue gains at its equipment and industrial components division, though these were offset by a drop in sales at the power systems operation.

The latter was hit by reduced activity in the Western Canada oil and gas production sector. The company saw equipment sales jump on greater demand from the construction sector. Consolidated backlog fell 17 percent, in large part due to lower customer orders in the mining and energy producing sectors.

Wajax’ exposure to the natural resource sector as well as consistent growth from expanding its various niches are the reasons why it’s a Portfolio recommendation. But these reasons also explain why it’s an Aggressive rather than a Conservative Holding.

The good news is these numbers are by no means symptomatic of a deteriorating business position. Rather they reflect anticipated ups and downs that were in line with expectations. Management has maintained projections for higher earnings this year, despite anticipating “softness” in mining and construction into 2013.

The payout ratio is 83.5 percent, which may preclude another dividend increase until next year. The stock, however, is now selling below my target of USD45 for those who don’t already own it.

All the Numbers Fit to Print

Here’s the summary of where to find my analysis on all Canadian Edge Portfolio Holdings reporting calendar third-quarter earnings so far and when to expect the rest to come in.

I’ll summarize results for those not reporting by press time in a Flash Alert next week. Stay tuned.

Conservative Holdings

Aggressive Holdings

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