Editor’s Note: In Brief is the executive summary of the April 2012 issue of Canadian Edge. Please use it as a guide to reading the issue. — RSC

Last year about this time, a pair of what came to be known as “Black Swan” events hit global stock markets.

One was the earthquake followed by a tsunami that devastated Japan’s coast, killed upward of 20,000 people and shut down that country’s nuclear power industry and industrial supply chain.

The other was the “Arab Spring,” which suddenly destabilized countries producing much of the world’s remaining cheap oil.

The result was a sharp selloff that extended through the summer with the escalating European and US government debt crises. And it took a powerful fourth-quarter rally to put the Canadian Edge Portfolio back into the black for the year.

Like the birds of that color in nature, Black Swan events in the markets are dangerous because they’re extremely rare and, by definition, unpredictable. Damage is often severe before investors have time to protect themselves.

This year global credit markets are still unsettled. Oil prices remain well above USD100 a barrel. And though economic growth in North America is decidedly picking up, Europe is weak and Asia is increasingly uncertain.

The Black Swan event for Canadian Edge stocks, however, is a 28 percent plunge in North American natural gas prices, as extremely mild winter temperatures have pushed US supplies in storage 59 percent above their five-year average. On a per-British thermal unit basis gas is now barely a tenth the price of oil, its closest substitute.

Natural gas has been in a bear market on these shores since peaking in late 2005 in the wake of the devastation wrought by hurricanes Katrina and Rita. That’s the product of exploding output from immense and low-cost shale reserves and the fact that the only liquefied natural gas (LNG) capacity in North America is for imports, which to date has dwarfed surging demand for gas to generate electricity.

What makes this year’s steep plunge a Black Swan event is its velocity and magnitude. Sub-USD2 gas prices have pushed producers that were previously successfully managing the long-term price decline to the breaking point and beyond.

Even worse, the full effect on cash flows and therefore dividends won’t be felt until later this year, when price hedges have expired. That means the impact on share prices will only be realized later this year as well.

Over the past couple years I’ve steadily repositioned the CE Portfolio toward companies focused on producing oil and natural gas liquids (NGL) rather than natural gas.

This month I recommend a pair of moves that push us further in that direction. These moves shouldn’t sacrifice potential upside or yield.

I also remain hyper-cautious on companies’ debt burdens. Last month Conservative Holding Colabor Group Inc (TSX: GCL, OTC: COLFF) cut its dividend by 33 percent due to a combination of reduced margins from competition and the need to reduce debt.

My expectation is still that this company will follow the successful example of Conservative Holding TransForce Inc (TSX: TFI, OTC: TFIFF), which has gained 36 percent this year to counter our 29 percent loss in Colabor. TransForce has built a solid franchise by consolidating the once diffuse transportation and logistics industry, just as Colabor is now attempting to do in distribution of food and related products.

This is why I’m sticking with this company for now. But Colabor’s dividend cut is yet another warning sign of what can happen when high leverage–in this case used to make acquisitions–combines with weak business conditions.

The good news–as I highlight in this month’s Feature Article–is that the bullish case for Canada is strong as ever. Prime Minister Stephen Harper’s Conservative Party government has introduced a budget that will bring accounts back to balance, keep corporate tax rates the lowest in the developed world, reduce regulation and preserve national health care, keeping that burden off of business.

The country’s vast resource base is being developed as never before, with wealth multiplier effects for everything from heavy industry and transportation to finance and real estate.

Banks are in the pink of health, demonstrated by robust fiscal 2012 first-quarter (ended Jan. 31, 2012) earnings. Real estate is healthy, with only the wealthy holding high levels of leverage. And the only problem policymakers are having with the loonie is keeping it from rising too fast against the US dollar.

Even over-valuation of individual stocks is far less of a problem now than just a few weeks ago. For example, strong companies like AltaGas Ltd (TSX: ALA, OTC: ATGFF) and Keyera Corp (TSX: KEY, OTC: KEYUF) for months traded well above my buy targets of USD32 and USD42, respectively. Today both are on the bargain counter once again.

Finally, more and more companies are raising dividends. For example, Bird Construction Inc (TSX: BDT, OTC: BIRDF) hiked its payout by 9.1 percent effective with this month’s payment. And Pembina Pipeline Corp (TSX: PPL, NYSE: PBA), as promised, raised its monthly dividend by 3.8 after completing its merger with Provident Energy Ltd, marking its return to dividend growth with its first boost since July 2008.

The upshot: Despite the setbacks from falling gas, debt pressures and other risks yet to surface, we’re still poised to post another great year in 2012. The secret is to stay diversified, balanced and nimble enough to shuffle the deck from time to time–i.e. being willing to swap stocks for better looking ones on occasion.

“Buy and hold” is the best way to realize big yields, hold down taxes and transaction costs and enjoy the benefit of rising dividends, which push up share prices. And a brief scan of the “Original Recommended Date” column in the Portfolio tables clearly shows “buy and hold” is always my preference.

But marriage is for people, not stocks. And as I pointed out at the beginning of 2012, dealing faster with losers is often the key difference-maker inunsettled times like these.

Portfolio Action

This month’s most important Canadian Edge Portfolio action is a double-switch in the Aggressive Holdings.

Stocks in this part of the Portfolio are chosen intentionally for their ability to leverage economic growth, in most cases rising long-term demand and prices for natural resources. Historically, when it comes to oil and gas producers I’ve mostly favored companies with a balanced output mix between the two fuels. That’s still my long-term preference.

But the titanic first-quarter crash in natural gas prices–this year’s signature “Black Swan” event thus far–has temporarily changed the calculus.

Balanced companies are still likely to outperform in the long haul, as gas use rises in North America and, ultimately, prices recover. In the near term, however, falling gas prices have pushed most gas-weighted companies past the breaking point, and even more balanced fare face increasing risk of going there. As we saw in the second half of 2008, energy producer stocks can fall a long way and fast under the wrong circumstances. The threat of this happening again has led me to recommend making two swaps.

First, I’m replacing Enerplus Corp (TSX: ERF, NYSE: ERF) with Pengrowth Energy Corp (TSX: PGF, NYSE: PGH). Both are balanced companies yielding 9 percent-plus. But Pengrowth’s fourth-quarter numbers look a lot better, and its merger with NAL Energy Corp (TSX: NAE, OTC: NOIGF) will give it much needed scale. Pengrowth, a High Yield of the Month selection, is a buy up to USD10.

PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF), also a High Yield of the Month profile, is replacing Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE). Penn West still has the most prolific reserves in Canada. But PetroBakken’s light oil in the Bakken region is also quite rich, and it’s starting to do a much better job getting its black gold out of the ground.

In contrast to Penn West, PetroBakken’s operating costs fell sharply in the fourth quarter, even as it ramped up output. And it’s 87 percent oil by output, versus 65 percent for Penn West. Buy PetroBakken up to USD18.

Note that I’m holding onto Colabor Group Inc (TSX: GCL, OTC: COLFF), though as an Aggressive Holding after last month’s 33 percent dividend. The payout reduction is being made primarily to reduce debt and aid the company’s restructuring after a wave of mergers last year. But it also betrays greater exposure to economic swings than it has appeared to now.

In my view, Colabor is still on track to build a franchise from the highly fragmented food and related products distribution industry in Canada, just as TransForce Inc (TSX: TFI, OTC: TFIFF) has done so successfully in what was once a highly diffuse logistics and long haul transport sector. But getting there with it is going to require us to be very patient as investors. It may also work out that the company is stymied in its plans and we may wind up selling the stock at a latter date.

At this point, however, the lowered dividend appears sustainable and I’m willing to give the company more time. Now an Aggressive Holding, Colabor is a hold for those who already own it.

Provident Energy Ltd (TSX: PVE, NYSE: PVX) has successfully merged into Pembina Pipeline Corp (TSX: PPL, NYSE: PBA). Shareholders should by now have received 0.425 shares of Pembina for each share of Provident they previously held. This is a stock-for-stock deal with no tax implications for Provident or Pembina shareholders.

Pembina now trades on the New York Stock Exchange (NYSE) under the symbol PBA. Any shares held under the symbol PBNPF should now be tradable under the NYSE symbol.

Finally, I’ve downgraded Extendicare REIT (TSX: EXE-U, OTC: EXETF) and Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) to holds. The former is gearing up to convert to a tax-paying corporation in July and will remain a hold until there’s clarity on the post-conversion dividend policy.

The latter is a hold solely because of the crash in gas prices. Management says it can produce gas very profitably at a price of USD1 per million British thermal uUnits. But until we see a quarter of results at these prices, caution is advised.

High Yield of the Month

High Yield of the Month features the two best buys for April. If you’re starting a portfolio, buying HYotMs each month is one good strategy, provided the picks meet your own risk-reward preferences.

This month’s choices are two new picks for the Aggressive Holdings, a double switch as I’m replacing sale candidates Enerplus Corp (TSX: ERF, NYSE: ERF) and Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE).

In place of Enerplus is Pengrowth Energy Corp (TSX: PGF, NYSE: PGH), which is merging with NAL Energy Corp (TSX: NAE, OTC: NOIGF) to gain scale to weather the crash in natural gas prices. Both Pengrowth and NAL have been moving successfully toward increasing liquids production. Both have low payout ratios, NAL mainly because of its recent dividend cut.

Pengrowth is paying very little premium for the assets and is cheap in its own right with low debt. The current yield of over 9 percent is well covered at a payout ratio of just 42 percent, well below Enerplus’ 68 percent. Buy Pengrowth Energy up to USD10.

Replacing Penn West is PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF), a smaller but much faster growing producer that’s also much more oil-weighted (87 percent of production).

As its name suggests, PetroBakken’s primary assets are in the Bakken trend, which is rich in extremely valuable light oil. Up until the past couple of quarters the company had difficulty meeting production and cost targets, in part because of horrific weather. Fourth-quarter results demonstrate strong progress in raising production and cutting costs, and further gains are anticipated in 2012.

The stock pays a monthly dividend with a yield of approximately 6 percent. And with a payout ratio of just 19 percent, it looks set to grow that as output continues to rise and it pays down debt. Buy PetroBakken Energy up to USD18.

Feature Article

The historic natural gas price crash, credit market uncertainty and tough competition are threatening dividends at some Canadian companies. The case for the country, however, is as solid as ever.

This year it’s likely to be Canada’s ties to the US that provide the key catalyst for growth, offsetting continuing weakness in Europe and uncertainty in Asia. But the country’s strong banking system and solid fiscal condition–despite what should be temporary deficits in Ottawa and the provinces–continue to stand out quite positively in the wider world.

Unemployment and inflation are low, and corporate borrowing rates are at the lowest levels in decades, still encouraging investment as well as strengthening balance sheets. Canada’s natural resource wealth is being tapped as never before, opening up opportunities in everything from energy infrastructure and transportation to banking and real estate. The Canadian dollar has become increasingly attractive, with many central banks increasing holdings as an alternative reserve currency. This promises to keep the loonie strong, providing an additional boost to US investor returns.

Finally, more and more companies are returning to dividend growth, sharing their improving fortunes with shareholders.

I examine the bull case and where it stands nearly four years from the Great Crash of 2008 and highlight industries best set up to prosper from it. I also look at the primary risks to the case for Canada and how to protect against them.

Canadian Currents

Iluka Resources Ltd (ASX: ILU, OTC: ILKAF, ADR: ILKAY) is uniquely positioned to offer commentary on China’s inevitable transition toward a domestic-demand-driven economic model.

Here, via a preview of CE’s sister letter Australian Edge, is a look at the company, what it does and why it can sustain and grow dividneds well into the 21st century.

Tips on Trusts

This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide.

Dividend Watch List–Two Canadian Edge How They Rate companies cut dividends last month.

AvenEx Energy Corp’s (TSX: AVF, OTC: AVNDF) fourth-quarter distributable cash flow covered its payout by nearly a 2-to-1 margin, reflecting solid liquids production and strong oil prices.

Nonetheless, management reduced its payout by 22.2 percent to reflect the rolling off of natural gas selling price hedges starting in April. The new rate looks conservative, even in light of the steep drop in gas prices the past several months.

On the other hand, until we see a definite bottom for gas prices and how earnings are affected by the loss of hedges, AvenEx is a hold.

That’s also the case for Colabor Group Inc (TSX: GCL, OTC: COLFF), which cut its dividend by 33 percent after reporting fourth-quarter earnings that were well below expectations. The distributor of food and related products to restaurants and stores faces tough competition as it attempts to gain scale in Eastern Canada and enter markets in Western Canada.

The dividend cut reflects in part a need to keep pricing down to keep and attract business as well as to reduce debt taken on from a recent string of acquisitions. Colabor’s road to growth is very similar to that taken by successful CE recommendation TransForce Inc (TSX: TFI, OTC: TFIFF), which has built a strong North American transportation services franchise by relentlessly acquiring smaller rivals and adding new business. TransForce, too, had many ups and downs along its road to growth, and I expect Colabor to ultimately be no less successful.

Nonetheless, I want to see better numbers before upgrading this stock to a buy once again. Colabor is a hold.

CML Healthcare Inc (TSX: CLC, OTC: CMHIF) is off the List after reporting robust fourth-quarter results that demonstrate it’s successfully exited the US and maintained financial strength. CML is now a buy up to USD10.

Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF), too, has earned its exit from the Watch List after posting solid fourth-quarter results and sponsoring a successful equity offering that eliminates near-term refinancing challenges. But Chartwell Seniors Housing also remains a hold.

Freehold Royalties Ltd (TSX: FRU, OTC: FRHLF) is also off the Watch List. The company now derives 90 percent of cash flow from oil, limiting exposure to falling natural gas prices. The payout ratio is well below management’s target as well. Freehold Royalties rates a hold.

Here’s the rest of the Watch List, which now reflects fourth-quarter and full-year 2011 results.

Aston Hill Income Fund (TSX: VIP-U, OTC: BVPIF)–Investment income still badly trails this closed-end fund’s actual dividend, which is only possible if management is using a lot of leverage.

That means risks are high of a dividend cut, at least until investment income moves a lot higher. SELL.

Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF)–The new rate looks safer after the recent dividend cut. But pulp and paper market prices are still soft, and the recent reorganization that left Canadian Forest Products with 52 percent of the stock is a potential wild card. Hold.

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–Fourth-quarter earnings were generally in line with the reduced guidance management gave last year. The key, however, remains what the company can negotiate for its Cardinal power plant when the current contract expires. Negotiations with the Ontario Power Authority have been ongoing for some time, and it still looks like the new rate will be substantially below the old one.

That means a dividend cut is nearly certain, though possibly somewhat less than the market is currently pricing in. Hold.

Chorus Aviation Inc (TSX: CHR/B, OTC: CHRVF)–The key here remains the outcome of contract arbitration with cash-strapped Air Canada (TSX: AC/A, OTC: AIDIF).

We may see a decision or settlement this spring. But until there is one, the risk of a dividend cut is high. Hold.

Data Group Inc (TSX: DGI, OTC: DGPIF)–Fourth-quarter distributable cash flow per share dropped 21.9, as the company absorbed corporate taxes. The payout ratio, however, was only 77 percent for the quarter.

The stock remains on the Watch List because of uncertainty about its print-to-digital transition. But it appears to be on the right track. Hold.

Enerplus Corp (TSX: ERF, NYSE: ERF)–The company’s plan to boost liquids production and hold its 18 cents per share dividend may be running up against the harsh reality of crashing natural gas prices.

Management may try to cover the shortfall in the near term by drawing on its credit lines. But until we see some better numbers, there’s going to be uncertainty about the payout. SELL.

EnerVest Energy & Oil Sands Total Return Trust (TSX: EOS, OTC: EOSOF)–The closed-end fund’s holdings have not yet fully absorbed the full impact of crashing natural gas prices, and management continues to pay dividends from return of fund capital and leverage. SELL.

Extendicare REIT (TSX: EXE-U, OTC: EXETF)–The owner-operator of senior care facilities appears to be on the right track despite deep cuts in US Medicare payments and erratic policymaking in Washington.

It is converting to a corporation in July, however, and the dividend will be at risk until a new payout policy is firmly established. Hold.

FP Newspapers Inc (TSX: FP, OTC: FPNUF)–The company’s fourth-quarter results were generally solid, and cash flow covered the dividend with some room to spare.

But the newspaper business continues to shrink, and digital business growth may or may not be keeping up. SELL.

GMP Capital Inc (TSX: GMP, GMPXF)–Fourth-quarter 2011 results weren’t much better than third-quarter numbers. Management maintains the current dividend level is “prudent” and asserts the company is holding onto market share in key niches.

But the most recent payout ratio is 200 percent and must come down for the dividend to hold. Hold.

New Flyer Industries Inc (TSX: NFI, OTC: NFYED)–Management states it plans to cut the dividend by 50 percent in August, as the company adjusts to a tough market and restructuring from a “staple share” to an ordinary common stock.

Fourth-quarter numbers showed improvement, but free cash flow was again negative, indicating the cut could be even deeper. And the 50 percent reduction is clearly not reflected in the current share price. SELL.

Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF)–This closed-end fund is still paying its distributions from capital, and with mining stocks lagging that may be the case for a while.

The fund’s price has come off in recent months but is still a 10 percent premium to the value of its assets. A dividend cut would almost surely trigger a further price drop. SELL.

Ten Peaks Coffee Company Inc (TSX: TPK, OTCL SWSSF)–The fourth-quarter payout ratio ticked up to 87 percent, as sales growth was offset by a sharp rise in coffee costs.

The company is having success selling to specialty dealers, but another dividend cut looks likely. SELL.

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF)–Costs continue to rise for this small energy producer, ticking up 35.6 percent in the fourth quarter, as does its payout ratio.

The focus is on oil rather than gas, but costs are nonetheless putting the squeeze on profits. And there’s no sign the company is ready to turn it around. SELL.

Bay Street Beat–Here’s how Bay Street reacted to the second and final wave of Canadian Edge Portfolio Holdings’ earnings announcements.

Tips on DRIPs—Reinvest your dividends paid by New York Stock Exchange-listed Canadian companies–in some cases at a discount and without paying commissions

How They Rate

CE Safety Ratings are based on six operating and financial criteria. Companies meeting all six criteria are rated my highest rating of “6.” “0” is the lowest rating, indicating companies that meet no safety criteria. Safety criteria are described in the text below the How They Rate table and are as follows:

• One point if Payout ratio meets “very safe” criteria for the sector.
• One point if Payout ratio has longer-term visibility.
• One point if Debt-to-Assets ratio meets “very safe” criteria for the sector.
• One point if the company’s debt maturing before Jan. 1, 2013, is less than 10 percent of its market capitalization.
• One point if the company’s primary business is recession-resistant. Qualifying varies from company to company, though virtually all Electric Power and Energy Infrastructure companies qualify, while no Energy Services companies do.
• One point if the company has not cut its distribution over the preceding five years.

I list trusts and high-yielding corporations by the following sectors:

• Oil and Gas–All energy producers are included here.
• Electric Power–Power generators.
• Gas/Propane–Distributors from propane to packaged ice.
• Business Trusts–A range of businesses involved principally with consumers.
• REITs–All qualified real estate investment trusts.
• Trust Mutual Funds–Closed-end funds holding portfolios of individual trusts.
• Natural Resources–Trusts and corporations that produce resources and raw materials other than oil and gas.
• Energy Services–Trusts and corporations whose main business is providing drilling, environmental or other services to energy producers.
• Energy Infrastructure–Trusts and corporations that own primarily pipelines, processing facilities and other fee-generating assets.
• Information Technology–Trusts and corporations that provide communications, newspaper, directory and other information services.
• Financial Services–Canada’s banks, investment houses and other trusts and corporations feeding that business.
• Food and Hospitality–Trusts and corporations that franchise restaurants, own and operate hotels and manufacture and distribute food and beverages.
• Health Care–Trusts and corporations involved in the medical care and/or supply business.
• Transports–These trusts and corporations ship freight and move passengers by bus, truck, rail or air.

Coverage Changes

I no longer track Whiterock REIT, which has de-listed from the Toronto Stock Exchange (TSX) and is no longer trading on the US over-the-counter (OTC) market.

The holder of office properties has been taken over by Dundee REIT (TSX: D-U, OTC: DRETF). Canadian investors should have received a combination of cash and equity units per what they specified with the offer. US investors who didn’t sell their Whiterock units per my recommendation have been cashed out at approximately CAD35.30 per unit of Dundee they would have received.

Note that FutureMed Healthcare Products Corp, which has also de-listed from the TSX and is no longer active on the OTC, has been taken over by Cardinal Healthcare Canada.

Those who didn’t sell FutureMed ahead of time per my recommendation should by now have received CAD8.16 per unit in cash. It will be removed from How They Rate effective with the May 2012 issue.

So will Provident Energy Ltd (TSX: PVE, NYSE: PVX), which has now successfully merged with Pembina Pipeline Corp (TSX: PPL, NYSE: PBA). Provident shareholders should now have 0.425 shares of Pembina per former share of Provident. There are no tax consequences for Provident holders from the merger. Dundee and FutureMed are cash-outs for US investors and any capital gains will be taxable.

Advice Changes

Here are advice changes for this month. See How They Rate for changes to buy targets and other data. Note data in How They Rate and the Oil & Gas Reserve Life Table now reflect fourth-quarter and full-year 2011 numbers.

ACTIVEnergy Income Fund (TSX: AEU-U, OTC: ATVYF)–To Hold from Buy @ 10. The crash in natural gas prices hasn’t yet filtered down completely to affect this closed-end fund’s energy-focused holdings.

AvenEx Energy Corp (TSX: AVF, OTC: AVNDF)–To Hold from Buy @ 6. The stock yields nearly 10 percent even after the 22.2 percent dividend cut, which should limit further downside. But gas prices, and profits, still may not have hit bottom.

Bird Construction Inc (TSX: BDT, OTC: BIRDF)–To Hold from Buy @ 12. The stock deserves a boost in buy target to USD13.50 after the 9.1 percent dividend increase announced last month and solid fourth-quarter numbers. But it’s gone well past that and likely needs a breather.

Boston Pizza Royalties Income Fund (TSX: BPF-U, OTC: BPZZF)–To Hold from Buy @ 14. The company has reported very strong results and has increased the dividend 6.5 percent as well. It’s also surged well past my buy target and looks due for a rest.

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–To Hold from SELL. Fourth-quarter results were in line with management’s reduced expectations. More important, the Cardinal plant is now only 32 percent of cash flow, and it looks like a good chunk of its revenue will be preserved under a new contract with the Ontario Power Authority.

There’s still almost certainly going to be a dividend cut, but most likely not as much as what’s now priced in. It’s for speculators only.

CML Healthcare Inc (TSX: CLC, OTC: CMHIF)–To Buy @ 10 from Hold. Fourth quarter numbers show the company is able to earn its dividend and fund growth without its now-divested US operations.

Data Group Inc (TSX: DGI, OTC: DGIPF)–To Hold from Buy @ 4. The company’s fourth-quarter earnings were very encouraging, and the payout ratio came down again to 77 percent. But the stock has now moved well above my buy target of USD4.

Enerplus Corp (TSX: ERF, NYSE: ERF)–To SELL from Hold. Management maintains it can keep paying its current dividend and follow through on its plan to expand production of light oil in its Bakken lands.

Unfortunately, falling natural gas prices are going to make that a lot more difficult. And recent market action shows a dividend cut, should one occur, will take the already fallen stock price down further.

Extendicare REIT (TSX: EXE-U, OTC: EXETF)–To Hold from Buy @ 10. The pending conversion of this real estate investment trust to a corporation shouldn’t impact profitability or the dividend. It should also be a non-taxable event on both sides of the border.

But until the transaction is complete, the future will be murky. Stick with what you have if you own it; otherwise, wait on some clarity before jumping in to this well-managed company.

First Quantum Minerals Ltd (TSX: FM, OTC: FOVLF)–To SELL from Hold. The company’s rising costs and 11.3 percent drop in global copper output are troubling signs, despite the 5.9 percent boost in the semi-annual dividend.

Freehold Royalties Ltd (TSX: FRU, OTC: FRHLF)–To Hold from SELL. Only 10 percent of fourth-quarter revenue was from sales of natural gas. Production has dropped on the company’s lands, but the payout ratio is conservative and debt is no longer a real concern.

Manitoba Telecom (TSX: MBT, OTC: MOBAF)–To Hold from Buy @ 32. The stock has surged well past my buy target and is only a buy on dips.

NAL Energy Corp (TSX: NAE, OTC: NOIGF)–To Hold from SELL. Fourth-quarter results show the move to oil is paying off and the merger with Pengrowth Energy Corp (TSX: PGF, NYSE: PGH) will create a much stronger company.

National Bank of Canada (TSX: NA, OTC: NTIOF)–To Hold from Buy @ 75. The bank looks stronger than ever, but the stock has surged well past my buy target.

Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–To Buy @ 10 from Hold. Merging with NAL Energy Corp (TSX: NAE, OTC: NOIGF) will accelerate the company’s focus on oil and natural gas liquids and create a company with more scale and improved ability to handle energy market volatility.

Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–To SELL from Buy @ 25. The company still has a lot of value in the ground, and it’s weighted to liquids. But its costs and debt are still high and output gains look muted in the near term, and PetroBakken (see below) is a better bet.

PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–To Buy @ 18 from Hold. The stock has more than doubled off last year’s lows. But fourth-quarter results make a compelling case that the best is yet to come for this company, which is rapidly increasing oil output from its Bakken holdings.

Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–To Hold from Buy @ 22. Management says it can make money even at USD1 natural gas, and the numbers back up their claim. But gas is 90 percent of output, and its price is in free-fall.

I’m not backing off of this company, which still earns a CE Safety Rating of 4. But new purchases should wait on some clarity on gas prices.

The North Western Corp (TSX: NWC, OTC: NWTUF)–To Buy @ 22 from Hold. Fourth-quarter earnings were again strong, and the payout ratio is down to 55 percent, spurring an 8.3 percent dividend boost. That return to dividend growth is also a great sign for the future.

Veresen Inc (TSX: VSN, OTC: FCGYF)–To Hold from Buy @ 14. The shares have jumped well past my buy target of USD14. The company looks healthy but is a buy only on dips to that level.

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF)–To SELL from Hold. A sharp rise in operating costs, lackluster output gains and pending debt maturities: All are growing concerns for this small producer. The best way out looks like a takeover but there are much better plays in oil with far more secure dividends.

Ratings Changes

Here are changes in CE Safety Ratings, reflecting fourth-quarter 2011 earnings results, debt maturities for 2012 and 2013, and recent weakness in energy prices.

AvenEx Energy Corp (TSX: AVF, OTC: AVNDF)–To 2 from 3. The 22.2 percent dividend cut will keep the payout ratio within management’s target range in the first half of 2012, as natural gas selling price hedges start to come off this month. But gas still may not have hit bottom.

First Quantum Minerals Ltd (TSX: FM, OTC: FOVLF)–To 1 from 2. The company’s rising costs and 11.3 percent drop in fourth-quarter global copper output clearly limit future earnings visibility, as politics play an ever-more dangerous role in profitability.

Freehold Royalties Ltd (TSX: FRU, OTC: FRHLF)–To 2 from 1. The company’s payout ratio has fallen to 67 percent as of the fourth quarter. That earns the stock another point under the CE Safety Rating System.

Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–To 3 from 4. Persistently high costs and lackluster production gains limit future earnings visibility, despite the company’s unmatched reserve base.

PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–To 3 from 2. Fourth-quarter results show solid production gains and much progress on cost controls, strongly increasing future earnings visibility.

TransAlta Corp (TSX: TA, NYSE: TAC)–To 4 from 5. Low natural gas prices, new environmental regulations and wholesale market competition have reduced earnings visibility, though other metrics for this company are still strong.

More Information

How They Rate has automatically updated US dollar unit/share prices, dividend payment rates in US dollars, yields, most recent dividend dates, dividend frequency and debt-to-capital ratios. Note that our quote service sometimes includes special annual distributions along with the regular monthly payments.

How They Rate also includes several free links. Clicking on the Toronto Stock Exchange (TSX) symbol will now take you directly to the Google Finance page for every company in the How They Rate coverage universe.

Clicking on the US symbol of a company takes you to a chronological listing of every Canadian Edge and CE Weekly article in which that trust has been featured. You can also use that page to access articles on other trusts by typing in the relevant exchange and symbol in the “Search Query” box at the top of the page.

For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on dividend paying equities. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission.

The Toronto Globe & Mail features the “Globe Investor” section with all the latest news. Dominion Bond Rating Service is the pre-eminent credit rater in Canada.

The Bank of Canada has a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.

How They Rate can now be accessed several places on the Home Page. The Income Trust Tax Guide has backup to file distributions as “qualified dividends.”

Roger Conrad
Editor, Canadian Edge