In September 2013, when we added the CE Portfolio Aggressive Holding to the Dividend Watch List, we noted that Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF) would likely enjoy a bounce on the Toronto Stock Exchange (TSX) if management did what the market at the time appeared to be telling it to do and cut its CAD0.08 per month, CAD0.96 per year dividend.

Lightstream carries a heavy debt burden, and the significant payout commitment added to demands on cash flow that threatened to impede production growth from its attractive set of light-oil assets.

Management did relent, stepping back from its long-held position that the CAD0.08 monthly dividend rate was a key component of its investment proposition.

For most of 2013, leading up to the Nov. 22, 2013, announcement of a 50 percent reduction in the dividend rate–along with other strategic priorities such as improving its sustainability ratio, strengthening its balance sheet by cutting debt and maintaining production at 2013 levels–Lightstream’s share price had lagged prices for crude oil. This represented a significant break, as the stock of the light-oil-heavy company had for some time tracked spot crude prices quite closely.

Lightstream’s share price has responded well to management’s hard decision, posting a 28.9 percent price-only rally on the TSX (it’s 25.4 percent in US dollar terms) through May 8, 2014.

In fact Lightstream is the top performer in total return terms among the six oil and gas producers recommended in the CE Portfolio Aggressive Holdings, at 26.2 percent in Canadian terms and 23.8 percent in US terms.

From Nov. 22, 2013, through May 8, 2014, the S&P/TSX Composite Index is up 8.2 percent in local terms, 5.2 percent in US terms. The S&P 500 Index is up 4 percent.

The S&P/TSX Energy Index, meanwhile, is up 14.7 percent in Canadian terms, 11.6 percent in US terms.

We maintained our “buy” rating on the stock but reduced our buy-under target from USD10 to USD8. In the July 2013 issue we had cut the target from USD15, after its debt situation and dividend issues had made a significant impression on market participants.

We wanted to give management two quarters to show meaningful progress on its initiatives, including asset sales and debt reduction. Maintaining its production rate was another key marker.

Based on results for the fourth quarter of 2013 and the first quarter of 2014, we’re comfortable recommending Lightstream Resources as a top pick for new money, with the caveat that this pick is for aggressive investors who appreciate the inherent risk of investing in oil and gas exploration and production companies, in this particular instance one with a still-significant debt burden.

Even after the solid rally over the past five months Lightstream as of May 8 is trading below our USD8 buy-under target, at CAD7.37 on the TSX, or approximately USD6.80 based on the prevailing Canadian dollar-US dollar exchange rate, where it yields 6.5 percent.

And it remains one of the cheapest Canadian oil and gas E&Ps, trading at a price-to-book ratio of 0.78.

Average daily production for 2013 increased to 46,438 barrels of oil equivalent per day (boe/d), 9 percent above 2012 average production of 42,784 boe/d.

Average fourth-quarter 2013 production was 45,521 boe/d, essentially unchanged compared to the third quarter and down 4 percent year over year.

First-quarter 2014 production averaged 43,959 boe/d, weighted 80 percent to light oil and liquids, a decrease of 3 percent from the fourth quarter of 2013 due to asset sales completed during the quarter of 1,700 boe/d. These dispositions were weighted 66 percent to non-core gas assets.

First-quarter production is on target with management’s 2014 plan.

Lightstream posted first-quarter funds from operations (FFO) of CAD174.97 million, or CAD0.88 per share, flat compared to the first quarter of 2013 due to higher netbacks being offset by lower production. Operating netback of CAD81.77 for the current period was up 15 percent year over year.

Better commodity prices drove a 20 percent sequential improvement in FFO, though FFO were down 1 percent compared to the first quarter of 2013.

The payout ratio for the period was 13.6 percent.

Capital expenditures in the first quarter, before acquisitions and dispositions, were CAD199 million, consistent with management’s plan to execute a balanced capital program in 2014. The first quarter is expected to be the most capital intensive quarter in 2014, as Lightstream spent approximately 36 percent of its CAD550 million annual budget.

As of March 31, 2014, Lightstream had CAD1.07 billion drawn on its credit facility. The company has completed CAD253 million of non-core asset sales to date in 2014, CAD141 million of which closed on May 2, 2014. Management used all proceeds to repay debt.

In conjunction with reducing the balance on its credit facility, Lightstream again extended the term one year to June 2, 2017, reduced the lending limit from CAD1.4 billion to CAD1.3 billion and retained a CAD100 million accordion feature.

The pro forma balance drawn on the facility as of March 31, 2014, including the royalty dispositions that closed on May 2, 2014, would have been CAD935 million.

Management is targeting asset sales of at least CAD300 million by the end of 2014, with the goal of reaching CAD600 million by the end of 2015.

Note that Lightstream’s “quick ratio,” measures the ability of a company to use cash and similar assets to pay down liabilities immediately, has improved to 0.4 as of March 31, 2014, from 0.2 as of Sept. 30, 2013.

Management estimated April production of approximately 43,500 boe/d, with activity focused on completing the remainder of wells drilled during the first quarter as well as facility construction at its Cardium business unit and in the Swan Hills area.

At the end of April Lightstream brought on an additional 17 wells, leaving 15 wells in inventory. By the end of the second quarter management expects to have its 3,500 boe/d Swan Hills facility operational with the majority of the wells in inventory on-stream. Drilling activity should resume early in the third quarter.

Having established a good trajectory as it attempts to thread the needle of fixing the balance sheet via asset sales but maintaining production and cash flow, Lightstream Resources is a buy under USD8 for aggressive investors.

A 6.5 percent yield, with the current dividend rate looking very sustainable, is solid compensation for the potential risk.

A longtime member of the CE Portfolio Conservative Holdings, specialized North American trucking and logistics outfit TransForce Inc (TSX: TFI, OTC: TFIFF) continues to add assets and grow its dividend, though the latter accomplishment is much the result of a sluggish economy that not only makes weaker competitors consumable as it consolidates a still-fragmented industry but also leads to weaker revenue and earnings growth.

Since hitting an all-time high on the TSX of CAD25.77 on Nov. 21, 2013, has bounced around but generally down, hitting a low of CAD22.71 on March 5, 2014, as concerns about the strength and durability of the North American economy have once again made their way front and center.

TransForce rallied to CAD24.78 as of April 22, but management’s report on first-quarter financial and operating results precipitated another mini-selloff. But this down-move has taken the share price to CAD23.52, or approximately USD21.72 based on prevailing exchange rates. And that’s below our buy-under target of USD23.

The company remains–pardon the pun–a force in the package-and-courier/truckload/less-than-truckload space, with its specific business model incorporating specialized logistics services such as waste management and other services for the energy sector.

First-quarter results were negatively impacted by severe winter weather this year compared to 2013. This factor combined with persistent weakness in key sectors of the North American economy explain most of the decline in earnings before interest and taxation (EBIT) in TransForce’s Package and Courier and Less-than-Truckload segments. Management noted another solid performance from its Waste Management operations.

Notwithstanding challenging market conditions, management continued to further optimize asset utilization and operating efficiency. This ongoing focus, and proceeds from the disposition of assets from rig moving operations that were previously shut down, produced a solid free cash flow of more than CAD35.1 million, which was mainly used to repurchase shares, compared to CAD20.5 million a year ago.

Total revenue for the period was CAD770.5 million, up from CAD749.7 million a year ago, the acquisition of Clarke Transport and Clarke Road Transport the main contributors to the 2.8 percent increase.

First-quarter EBIT–or operating income–was CAD33.2 million, or 4.2 percent of total revenue, compared to CAD44.6 million, or 5.9 percent of revenue, for the prior corresponding period.

Adjusted earnings per share were CAD0.20, down from CAD0.26 a year ago.

Package and Courier revenue was CAD306.6 million, up 0.8 percent year over year. US operations reported lower volumes, which was offset by higher prices for lower-margin customers. EBIT for the Package and Courier segment declined to CAD12.9 million from CAD17.2 million, with margin down to 4.2 percent from 5.7 percent.

In addition to higher costs associated with the severe weather, the Velocity unit had a negative impact on the EBIT margin. Management’s plan to optimize US delivery operations remains on track.

The Less-than-Truckload segment reported lower volumes and higher costs due to harsh winter weather. LTL revenue was CAD179.4 million, up from CAD148.9 million due to acquisitions, including Clarke and Vitran. EBIT for the segment was CAD4 million (2.2 percent margin), down from CAD12.1 million (8.1 percent margin).

Management noted “encouraging upward trends” for the segment as the quarter wore on, as consolidation has reduced fixed costs and provided the basis for a more efficient cost structure. Reduction of over-capacity has also generated margin improvements.

Truckload generated first-quarter revenue of CAD151.6 million, up from CAD141 million a year ago, mainly due to the Clarke Road Transport acquisition. EBIT was CAD6 million, or 4 percent of segment revenue, versus CAD6.5 million, or 4.6 percent of revenue, for the prior corresponding period.

Energy revenue declined to CAD78.7 million from CAD91.9 million, while EBIT and margin ticked up to CAD4.3 million and 5.5 percent, respectively from CAD3.3 million and 3.6 percent, respectively, a year ago. The revenue decline reflects management’s decision to close down the Canadian rig moving operations early in 2013 and to reduce activities in US.

“Other” specialized services revenue was CAD69.8 million, down from CAD76.8 million. EBIT was CAD11 million, or 15.7 percent of revenue, up from CAD10.4 million, or 13.5 percent of revenue, for the first quarter of 2013. Waste management margin remains healthy, and the company is “optimistic” about the prospect for growth in this sector.

Management continues to see “relatively flat” economic activity in the sectors TransForce serves in Canada, though it expects to see “some improvement” in the US. Organic growth will be “modest.”

Competitive pricing pressure in the Truckload and LTL segments appears to be easing. And the recent Vitran acquisition should drive top-line growth in 2014.

Management has made significant progress on its long-term growth strategy and its effort to expand margins continue. Although the market will remain challenging through 2014, recent share-price weakness offers long-term, dividend-focused investors an opportunity to establish new positions in an industry-leading company with a proven track record of operational execution and payout growth.

TransForce, which has raised its dividend three times and an aggregate 45 percent since the end of the Great Recession, is a buy under USD23.

For more information on Lightstream Resources, go to How They Rate under Oil and Gas. Click here to go to Lightstream’s company website.

Click here to go to Lightstream’s Yahoo! Finance page for its Toronto Stock Exchange (TSX) symbol and here for its US over-the-counter (OTC) listing. Both links include a wealth of information and data. The page for the OTC symbol includes a link to Yahoo! Finance’s very useful “Key Statistics” page, whereas the TSX symbol page does not include such a link.

TransForce is tracked under Transports. Click here to go to the company’s website. Click here to go to its Yahoo! Finance page for its TSX listing, which includes access to the “Key Statistics” page. Here’s the link to the Yahoo! Finance page for TransForce’s US OTC listing.

Lightstream is the smallest Oil and Gas company among the six from the group we hold in the CE Portfolio with a market capitalization of CAD1.476 billion.

TransForce, with a market capitalization of CAD2.328 billion, is dwarfed by fellow Transports in the CE How They Rate coverage universe such as Canadian National Railway Co (TSX: CNR, NYSE: CNI), Canadian Pacific Railway Ltd (TSX: CP, NYSE: CP) and fellow Aggressive Holding Magna International Inc (TSX: MG, NYSE: MGA) but it ranks No. 6 among 10 companies in the group.

Its size reflects what remains a highly fragmented North American transportation and logistics industry. Contrans Group Inc (TSX: CSS, OTC: CTFIF), for example, has a market cap of CAD501.8 million.

Both Lightstream and TransForce have plenty of liquidity on both sides of the border, both in TSX and US-listed symbols.

Lightstream trades on the TSX under the symbol LTS and on the US OTC market under the symbol LSTMF. TransForce trades on the TSX under the symbol TFI and on the US OTC market under the symbol TFIFF.

Lightstream is covered by 18 Bay Street and Wall Street analysts. Just two analysts rate the stock a “buy,” while 14 rate it a “hold.” Two analysts rate the stock a “sell.”

The average 12-month price target among the 17 analysts who provide such a figure is CAD6.99, with a high of CAD9 and a low of CAD6, implying a flat total return from a CAD7.47 closing price on May 7, including an annual dividend rate of CAD0.48 per share.

TransForce is covered by 12 analysts, six of whom rate it a “buy” and six of whom rate it a “hold.” There are no “sell” ratings on the stock.

The average 12-month price target among the 10 analysts who provide such a figure is CAD25.65, with a high of CAD29 and a low of CAD22.50. TransForce closed at CAD23.47 on May 7 on the TSX. Including a current annualized dividend rate of CAD0.58 per unit, TransForce would post a total return of 11.8 percent based on analysts’ consensus forecast.

As is the case with all stocks in the Canadian Edge coverage universe, you get the same ownership whether you buy in the US or Canada. These stocks are priced in and pay dividends in Canadian dollars. Appreciation in the loonie will raise dividends as well as the value of your shares.

Dividends paid by Lightstream Resources and TransForce are 100 percent qualified for US income tax purposes. Dividends paid by both companies are taxed at the now-permanent Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

Canadian investors enjoy favorable tax status for Lighstream and TransForce. For US investors, dividends paid into IRAs aren’t subject to 15 percent Canadian withholding tax, though they are withheld at a 15 percent rate if held outside of an IRA.