It’s time for a double switch in the Canadian Edge Aggressive Holdings.

Move one is to swap out Enerplus Corp (TSX: ERF, NYSE: ERF) for Pengrowth Energy Corp (TSX: PGF, NYSE: PGH), an energy producer with virtually the same yield but that appears far less exposed to the recent crash in natural gas prices.

Move two is to exit long-time underperformer Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE) for similar yielding but much faster growing PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF).

Why Pengrowth for Enerplus? It’s all in the numbers.

Pengrowth’s fourth-quarter payout ratio was 42 percent of funds from operations, the primary measure of profits from which dividends are paid. That’s well below Enerplus’ 68 percent.

Including capital expenditures, Pengrowth’s payout ratio was 124.8 percent for the quarter, versus 182.7 percent for Enerplus.

Moreover, Pengrowth’s fourth-quarter funds from operations per share rose 14 percent, while Enerplus’s actually sank 5.4 percent.

Enerplus’ operating costs were lower than Pengrowth’s at CAD11.64 per barrel of oil equivalent against CAD14.63.. But Enerplus’ operating costs were 38.2 percent higher than last year’s. Pengrowth’s, meanwhile, were actually 2 percent lower than year-earlier levels. And costs would have been considerably lower for full-year 2011 were it not for extreme wet weather and flooding in the first half the year.

As for exposure to falling natural gas prices, Pengrowth’s revenue from oil and gas liquids sales rose to 77 percent of total sales in 2011 from 70 percent in 2010. That’s against 67 percent for Enerplus. Pengrowth’s exposure fell to just 19.5 percent of revenue in the fourth quarter and is set to shrink further once the company completes its merger with NAL Energy Corp (TSX: NAE, OTC: NOIGF).

Adding NAL will make Pengrowth the second-largest intermediate producer in Canada behind Penn West.

Announced in late March, the deal needs approval of Canadian antitrust regulators as well as two-thirds of shareholders of both companies during votes slated to be cast in late May 2012. Close is currently expected by May 31, 2012.

To get NAL Pengrowth is paying less than a 10 percent premium to the target’s pre-deal price. The appeal to NAL holders is an immediate 20 percent dividend increase, with the promise of more as part of a well-managed company with exit production of 100,000 barrels of oil equivalent per day by the end of 2012. Pro forma output for the combined company is expected to average 86,000 to 89,000 barrels of oil equivalent per day for all of 2012. And Pengrowth’s operating costs are expected to decline to CAD13.75 per barrel.

Interestingly, Pengrowth’s projected capital expenditures for 2012 will hold steady after the merger. The company will simply focus resources on light oil reserves in Swan Hills, the central Alberta Cardium trend and southeast Saskatchewan as well as the Lindbergh oil sands project.

These efforts will provide further boost to output of liquids and reduce dependence on natural gas–and without adding to debt other than CAD200 million of the company’s existing credit line that will be drawn at closing.

Management intends to sell roughly 10 percent of “non-core” assets to fund Lindbergh in 2013-14, which is on track for startup at 12,500 barrels of bitumen per day in 2015.

The deal also leaves Pengrowth with CAD4.3 billion-plus in tax pools, ensuring it won’t pay taxes before 2015.

Enerplus’ capital program of CAD800 million for 2012 is also set to reduce dependence on gas and boost oil while ramping up overall output by 10 percent. But unlike Pengrowth’s plans, this spending will almost certainly jack up debt.

Both companies had debt-to-cash flow ratios of about 1.6-to-1 as of the end of 2011. And post-merger Pengrowth will have to refnance a CAD50 million bond issue due Apr. 23, 2013, as well as CAD79.7 million remaining on a NAL convertible bond due May 7, 2012.

That’s versus no maturities over the next two years for Enerplus. But Pengrowth also has a CAD1 billion credit line extending to Dec. 29, 2015, which as of Dec. 31, 2011, was wholly undrawn.

By contrast, Enerplus’ CAD1 billion line, on which CAD446.18 million is drawn, expires Oct. 13, 2014. As I point out in Dividend Watch List, management will have no choice but to run that up further this year to fund its capital program, that is if it wants to maintain its CAD0.18 per share monthly distribution.

I’ve been a fan of Enerplus and its management team for some years. I’ve tracked it for more than a decade, beginning in Utility Forecaster. But at this juncture, however, plunging natural gas prices make Pengrowth the higher-percentage bet.

Yielding more than 9 percent and selling for less than book value, Pengrowth Energy is a solid buy up to USD10.

My primary reason for preferring PetroBakken to Penn West is simple: output growth.

PetroBakken posted record fourth-quarter production of 48,007 barrels of oil equivalent per day, averaging 50,250 per day in December and topping exit production targets. December output was 18 percent ahead of last year, while full-quarter production was up 23 percent on a sequential basis.

This added up to a 52 percent jump in PetroBakken’s funds from operations per share over third-quarter levels and 45.9 percent over year-earlier levels. And it took the company’s fourth-quarter payout ratio down to just 19 percent.

Penn West did meet the mid-point of management’s output target for 2011. And it increased funds from operations by 43 percent over fourth-quarter 2010 levels, driving the payout ratio down to just 29 percent. The gains, however, were almost entirely due to a 25 percent increase in oil and natural gas liquids prices as well as a 20 percent jump in heavy oil prices.

Actual production rose just 2 percent.

PetroBakken’s proved-plus-probable reserves were increased 19 percent, as it replaced 2011 output by 315 percent. The company also invested CAD909 million last year, with wells drilled showing a 99 percent success rate.

The largest percentage production gain was a 37.3 percent jump from the Cardium light oil trend. But the company also enjoyed a 10 percent boost from its Bakken properties, which still contribute nearly half of total output.

Operating costs in the Bakken were just CAD9.11 per barrel of oil equivalent in the fourth quarter, among the lowest for any oil producer in North America. Company-wide production expenses were CAD10.97, up 22 percent from fourth-quarter 2010 but a significant improvement from levels earlier in the year.

Penn West, meanwhile, replaced 230 percent of reserves, but only before natural gas price revisions and asset dispositions. And operating costs surged to CAD17.48 per barrel of oil equivalent, up 10 percent from year-earlier levels.

Natural gas currently accounts for about 13 percent of PetroBakken’s overall output but less than half a percentage point of overall revenue. That’s a great deal of potential upside when natural gas prices do recover but basically no real downside as long as they stay depressed.

Penn West, meanwhile, still derives 35 percent of output from natural gas, which gives it more upside but also more exposure.

The balance sheet is one area where Penn West should stack up better than PetroBakken. That’s because the latter is growing and investing heavily relative to its size, while the former is an extremely conservatively run, mature company. But PetroBakken’s net debt-to-cash flow ratio is actually lower at 1.5-to-1 versus Penn West’s 1.9-to-1.

As of Dec. 31, 2011, Pengrowth had drawn CAD1.2 billion of its CAD1.5 billion credit line that matures Jun. 2, 2014. As of Mar. 15, 2012, Penn West had withdrawn CAD1.5 billion from its CAD2.75 billion credit line maturing Jun. 26, 2015.

As I wrote in a Feb. 16 Flash Alert, Penn West’s numbers did clearly demonstrate the company is getting back on track from production troubles that raised costs and depressed output in 2011.

PetroBakken, however, is growing faster, pays basically the same yield as Penn West–monthly rather than quarterly–and arguably has just as strong a balance sheet. New Aggressive Holding PetroBakken is a buy up to USD18.

What can go wrong at our two new Aggressive Holdings?

In any merger, there’s the chance of corporate culture clash, post-deal management disputes, suboptimal management of certain assets and negative financial impact if the acquirer has actually paid too much. These outcomes seem extremely unlikely in the case of Pengrowth-NAL Energy.

For one thing, both are energy producers headquartered in Calgary, Alberta, the heart of Canada’s energy patch. The merger is friendly and has a human link: Pengrowth Chief Operating Officer Marlon McDougall, who prior to mid-2011 was the Chief Operating Officer of NAL for five years. All insiders of both companies have entered support agreements to vote all shares in favor of the transaction.

As a part of this deal Pengrowth intends to terminate the management agreement between NAL and NAL Resource Management, a unit of Manulife Financial Corp (TSX: MFC, NYSE: MFC).

This move will eliminate considerable administrative costs, though it does mean Pengrowth’s current team will have to hit the ground running in terms of running the assets.

This task should be made immeasurably easier by the direction of COO McDougall. In any case, employee skill sets are strictly complementary in this industry.

As for PetroBakken, its central problem since inception has been the failure of actual operations to measure up to the hype that accompanied the initial public offering.

That’s the primary reason the stock basically fell for its first two years of trading, crashing from an initial level of CAD34.75 to a low of less than CAD7 in early October 2011.

Since then the stock is up more than 150 percent. But it’s still less than half the old high, and that’s despite a 50 percent surge in oil prices since the autumn 2009 offering. The primary reason is continuing skepticism that this company really does have its act together, particularly among investors who bought in two years ago when the hype surrounding the company was flowing fast and loose.

Any indication that PetroBakken’s operations are again succumbing to start-up problems would almost surely trigger new selling. Interestingly, the nay-saying doesn’t seem to extend to Bay Street houses covering the stock, 14 of which rate the stock a “buy” versus six who call it a “hold;” there are no “sell” recommendations. The last two changes in opinion, in March, were upgrades, and the average price target is 20 percent above current levels.

I’ll closely monitor PetroBakken for any sign of a relapse. But the biggest risk facing it and Pengrowth as well is simply the possibility oil prices will retrench significantly.

Energy producers can hedge against a drop in oil and gas prices. But, ultimately, profits rise or fall with those prices. The good news is North American oil prices are clearly depressed versus world prices, in large part due to bottlenecks in transportation that are rapidly being resolved. And the US economy is clearly in recovery, as this week’s employment data once again shows, suggesting demand is on the rise as well.

No one should ever own a dividend-paying energy producer if they’re not willing to live with volatility that comes with depending on oil and gas prices for profit. Those who aren’t are better off looking at more stable Portfolio companies, such as the Conservative Holdings.

Two are pipeline-energy infrastructure plays AltaGas Ltd (TSX: ALA, OTC: ATGFF) and Keyera Corp (TSX: KEY, OTC: KEYUF). Both make their fee-based revenue no matter how volatile oil and gas prices become. And the more they build, the higher their cash flows and dividends go.

Buy AltaGas up to USD32, Keyera anytime it sells below USD42.

For more information on Pengrowth and PetroBakken, go to How They Rate. Both companies are tracked under Oil and Gas. Click on their US symbols to see all previous writeups in Canadian Edge and CE Weekly. Click on the Toronto Stock Exchange (TSX) symbol to go to their Google Finance pages for a wealth of information, ranging from news releases to price charts. Click on their names to go directly to company websites.

Both companies are reasonably large, which should make it very easy to buy them either in Canada or in the US.

Pengrowth has a market capitalization of CAD3.26 billion, which will reach nearly CAD4.5 billion when the NAL Enegy Corp merger is completed. PetroBakken has a market cap of CAD3.11 billion, but it actually had a much higher one when it initially offered to the public. Both stocks trade with substantial volume on their home market, the TSX. Pengrowth also does very good volume on the New York Stock Exchange (NYSE), as does PetroBakken on the US over-the-counter (OTC) market under the symbol PBKEF.

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 of both companies are 100 percent qualified for US income tax purposes. Pengrowth is a former income trust that converted to a corporation on Jan. 3, 2011. PetroBakken was never an income trust but is a fully taxable corporation as well. Dividends paid into a US IRA aren’t subject to 15 percent Canadian withholding tax, though they are withheld at a 15 percent rate if held outside of an IRA.

Dividend taxes withheld from non-IRA accounts can be recovered as a credit by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation. Canadian investors will likely be able to defer a good chunk of their tax burden going forward as a return of capital.