Where We Stand

By Roger Conrad • September 7, 2012 • Portfolio Update

Thus far in 2012 Canadian Edge Portfolio Conservative Holdings have returned an average of 12.3 percent in US dollar terms.

Aggressive Holdings are up 2.0 percent, while the three Mutual Fund Alternatives have returned 9.7 percent.

Those are slightly better numbers than last month. One reason, as I noted in In Brief, is the continued strength in the Canadian dollar.

Another is strong second-quarter numbers, which had a particularly salutary effect on several stocks including Davis & Henderson Income Corp (TSX: DH, OTC: DHIFF).

You can read my analysis of all the results by following the links below.

Conservative Holdings

Aggressive Holdings

Wajax Corp (TSX: WJX, OTC: WJXFF) is a new addition this month to the Aggressive Holdings. I’ve highlighted the key developments for the distributor of mobile equipment, power systems and industrial components in this month’s Best Buys section, along with the particulars of its co-Best Buy for September, Conservative Holding EnerCare Inc (TSX: ECI, OTC: CSUWF).

Our strategy in Canadian Edge is to collect stocks of companies such as Wajax that are backed by financially strong and growing underlying businesses and pay us a generous and rising stream of dividends. Our goal is superior total returns, i.e. rising dividends plus capital appreciation. And we’ll hold on to companies so long as their numbers and guidance indicate their businesses are growing.

A portion of our return is constant and immediate, i.e. dividends which generally flow on a monthly basis.

If we choose our stocks wisely, however, the greater part of the return will eventually come from capital appreciation, as dividend growth inevitably pushes share prices higher.

Consequently, we’re fundamentally long term in outlook. We never intentionally buy or sell into momentum.

Instead, we try to turn momentum to our favor by seeking values, stocks backed by financially healthy and growing business that sell below what they’re worth.

Our buy targets are set to reflect value, based on a combination of safety that’s summarized in our CE Safety Rating, current yield and business growth. Sometimes our favorites trade above those recommended prices.

When that happens my advice is always to wait to buy. Current owners can consider taking a partial profit if the stock in question has become too large a piece of a portfolio.

Sometimes the stock trades below what I consider fair value, or even well below. The latter generally happens because investors perceive some risk and have sold en masse, creating selling momentum.

When a recommended stock drops sharply I always want to know the reason why. But so long as the underlying business numbers are sound I will stick around, as eventually investor perceptions of risk will shift and the stock will recover.

As I look at the rest of the 2012 and beyond, it’s clear that we’re still very much living in a world where many investors–including more than a few dividend-seekers–are buying and selling based on momentum. Rather than trying to decide on their own whether a stock is worth its price, they’re simply assuming rising stocks are safer than falling stocks.

So doing, they’re paying too much for rising stocks and selling out falling stocks too cheaply. And the result is extreme valuations and elevated volatility for stocks backed by companies in otherwise very steady businesses.

The psychological root of this market sentiment is the crash of 2008-09–the worst since the Great Depression–and the strong feeling of many investors that worse lies ahead. Happily, major events like 2008-09 generally don’t follow each other. That’s because individuals and corporations alike pull in their horns following a crisis, so there isn’t enough system-wide exposure for a repeat.

“Conservative” is definitely cool with Canadian Edge Portfolio recommendations now. Three years-plus of systematic deleveraging has left debt maturities negligible between now and the end of 2013. Payout ratios are also modest, even for the companies most exposed to the ups and downs of the economy and commodity prices.

In the near term the stock market is very much a creature of perception that can diverge wildly from reality. The upshot therefore is it’s impossible to tell how long this piling on mentality will last and when value hunting will come back in style. All we can do until then is buy and hold value, secure in the knowledge that so long as our picks perform as businesses they’ll eventually come through for us as stocks.

Below I look at where we stand with each of the current Canadian Edge Portfolio Holdings, both as businesses and as stocks. For more information see How They Rate and the Portfolio tables as well as the links in the list above for second-quarter earnings information.

Conservative Holdings

AltaGas Ltd (TSX: ALA, OTC: ATGFF) has returned 6.1 percent this year and currently sells just above my buy target of USD32.

This is a classic energy invest-to-grow stock that boosts cash flow and distributions as it adds assets through acquisition and construction.

Since posting strong second-quarter numbers last month, the company has completed the acquisition of SEMCO, adding gas utilities in Michigan and Alaska. It’s successfully expanded the Blair Creek facility in Alberta, which provides natural gas liquids (NGLs) processing capacity in the booming Montney play. And it’s brought the Harmattan co-stream project to the point of startup for late 2012.

All three are part of a CAD1.8 billion capital investment this year that will start generating cash flow from steady fees by early 2013. That should allow another solid dividend increase. In the meantime, AltaGas is a low-risk buy up to USD32.

Artis REIT (TSX: AX-U, OTC: ARESF) is up more than 27 percent thus far in 2012, a journey that’s pushed the units above my target of USD16.

Management’s strategy the past three years has been to aggressively acquire properties outside its initial core of Alberta, taking advantage of very low financing costs.

Funds from operations, the primary measure of REIT profitability, are now starting to show the benefit.

What’s unknown is when management will share the increased take with unitholders as distribution increases, or whether it will continue to focus mainly on continued expansion.

If there’s a distribution hike, I’ll raise the buy target.

Until then, new investors should wait for a dip to USD16 to buy Artis REIT.

Atlantic Power Corp (TSX: ATP, NYSE: AT) is up a bit over 6 percent for the year including dividends.

The main issue for the company right now is completing a 300 megawatt wind plant in Oklahoma that will sell all its output to local utility OGE Energy Corp (NYSE: OGE) under a 20-year contract. That project does appear to be on track to start generating cash flow in late 2012, potentially setting the stage for another dividend increase next year.

Meanwhile, existing assets appear to be running well, and the company is on track to meet management guidance.

I’ve pounded the table on this one for many years and still view the stock as a bargain up to USD16. Those with positions already, however, should look to other recommendations rather than loading up on a single pick.

Bird Construction Inc (TSX: BDT, OTC: BIRDF) is still up more than 22 percent. That’s despite pulling back sharply in late August when Alberta Infrastructure abruptly cancelled its CAD95 million contract to build the Alberta Public Safety and Law Enforcement Training Center in Fort Macleod, Alberta.

The stock has rebounded sharply this week, as at least some investors have apparently recognized the contract wasn’t included in backlog announced with second-quarter results and that there are plenty of other opportunities for Bird to grow revenue.

Meanwhile, the stock is again below my buy up to target of USD14.50, providing those without a position a solid entry point.

Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF) is up a little over 3 percent since I featured it last month as a Best Buy and added it to the Conservative Holdings.

The company derives its income from franchising real estate agents and enjoys a 22 percent market share in Canada. More than two-thirds of income is derived from fixed fees, with the rest based on transactional dollar volume of its member agents.

My reason for adding the stock was that its 8 percent yield seems to reflect undue pessimism for a very conservatively positioned company and an inflated perception of the risks to Canadian residential real estate. That’s still my view.

I continue to rate Brookfield Real Estate Services–which also enjoys the financial support of Brookfield Asset Management (TSX: BAM/A, NYSE: BAM)–as a buy up to USD14 for those yet to get in.

Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF) has been an investor favorite this year for safety, with a total return of better than 17 percent. Unfortunately, units of this limited partnership currently trade well above my buy target of USD30, so now is not a good time to enter.

On the bright side, there’s little risk to this company’s invest-to-grow story, which basically involves buying and building hydroelectric power plants in the US, Canada and Brazil. And management is still pursuing a New York Stock Exchange (NYSE) listing, which should improve liquidity.

This company has already returned to dividend growth, and I expect another boost early next year. But until that happens, I recommend buying Brookfield Renewable only on dips to USD27 or lower.

Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF) has returned to dividend growth for the first time since October 2003. The catalyst is successful asset growth, buoyed greatly by a very low cost of capital.

Since announcing earnings last month management has added another 405 suites via an acquisition in Calgary.

The problem with Canadian Apartment, as is the case with almost every other Canadian REIT, is high valuation.

The stock has returned about 18 percent this year and now trades more than 10 percent above my buy target of USD22.

There’s not much operating risk for this REIT, which has weathered the worst possible environments time and again.

But until the dividend rises a bit more this REIT deserves a lower valuation. Buy only on dips to USD22 or lower.

Cineplex Inc (TSX: CGX, OTC: CPXGF) is also up about 17 percent this year, having proven to investors it can grow earnings even when the movie fare is subpar.

The company has established a pattern of raising dividends in June, the last one being a 4.7 percent boost. That’s certainly sustainable over the long pull, as the company increases its dominance of what’s emerged as a surprisingly utility-like business for its steadiness.

The frequent problem with the stock has been valuation, but we may be on the verge of an opportunity to get in below USD28 after the selling of this week. Be patient and lock this one away if the market obliges us and you’ve yet to take a position.

Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) is one of the Portfolio’s bigger winners since late June and now sits up about 20 percent for the year.

Investors who seemed extremely wary of the company at a low price in mid-summer seem to have lost their fear as the price has risen. That, of course, is purely backwards thinking. It’s nice to see this company’s strengths recognized, as it’s well placed to keep growing in what are insulated niches of financial services.

When there’s a dividend boost I will definitely raise my buy target for Davis + Henderson. Until then, however, new investors should only buy on dips to USD20 or lower.

Dundee REIT (TSX: D-U, OTC: DRETF) has been a nice pickup since we added it to the Portfolio in February. The REIT is up roughly 20 percent including distributions, as it’s continued to post solid results.

Management’s latest move is an initial public offering (IPO) of its industrial properties, most of which it picked up with the Whiterock REIT merger. Dundee will continue to own about half of the new entity depending on demand for the IPO. The new company will be dubbed Dundee Industrial REIT and will start out with a cornerstone asset of 86 light industrial properties totaling 6.6 million square feet of leasable area across Canada.

Existing Dundee REIT unitholders won’t receive units in the IPO and so will benefit primarily from the cash it will generate for the parent, and possibly from a higher valuation as a pure office REIT. I will likely begin covering the new entity as a hold, at least until it develops a trading history.

In the meantime, Dundee REIT is a buy on dips to USD36 or lower, though I will raise my target on a distribution increase.

EnerCare Inc (TSX: ECI, OTC: CSUWF) is highlighted as a Best Buy this month. I run down its earnings and prospects in that section.

The stock is slightly underwater for the year but with dividends has generated a positive total return of 2.5 percent. Buy up to USD10 if you haven’t yet.

IBI Group Inc (TSX: IBG, OTC: IBIBF) is one of the few laggards among the Conservative Holdings, with a negative total return of 16.6 percent year to date. The primary reason is investor concern about the safety of its distribution, which has persisted despite generally solid earnings and management’s repeated assurances.

The stock price dropped sharply following the release of both first- and second-quarter results, despite what’s consistently been a bullish Bay Street outlook of seven “buys,” two “holds” and two “sells” among the analysts covering it. Insiders have also been consistent buyers, adding 166.6 percent to their holdings over the past six months.

So long as IBI keeps putting up good numbers, the stock will eventually recover, with its early 2012 range of USD14 to USD15 a likely first stop.

But it’s apparently going to take patience for investors to benefit.

IBI is still a buy up to USD15, but only for those who don’t already own it.

Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF) is up about 15 percent for the year. It also trades a bit more than 10 percent above my longstanding buy target of USD10.

That’s the result of having a very stable revenue stream, which continues to rise as the company invests in new projects and acquisitions.

This summer, the company acquired hydroelectric and wind power assets in British Columbia, Quebec and Ontario, raising some concerns at Dominion Bond Ratings Service, which cited heavy capital needs. Not even that, however, dampened investor enthusiasm for the stock.

In general, I’m supportive of companies that invest to grow, particularly in such steady businesses. These appear to be solid assets that will generate stable long-term cash flows. I’m content to hold the stock, which for all the concern about expansion carries little operating risk. But until there is a dividend boost my buy target will remain at USD10.

Just Energy Group Inc (TSX: JE, NYSE: JE) is actually in the positive column this year by about 5 percent. That’s despite jagged share price volatility that’s been well out of whack with the company’s steady business numbers.

Management’s latest move is purchasing a 15 percent stake in smart thermostat maker Ecobee, its third deal since the start of 2011 and a potential springboard to developing new products and services. Acquisitions like this one aren’t possible without a solid balance sheet, and Just Energy definitely proved it has one with the release of solid fiscal 2013 first-quarter results.

Seasonally weak distributable cash flow nearly covered the distribution. That belies the rumors of an imminent dividend cut circulated before the numbers were released, and is another clear warning for investors not to take every bearish opinion at face value.

I’m not advising anyone to double down on any single stock.

But Just Energy’s growing energy marketing franchise still looks like a value to me up to USD16.

Keyera Corp (TSX: KEY, OTC: KEYUF) traded below my buy target of USD42 for about a month this year, as investors fretted its profitability was about to get pummeled by falling NGLs prices.

As it turned out the company posted a 56 percent jump in distributable cash flow per share–the primary measure of profitability–largely on the strength of the NGLs infrastructure it added over the past 12 months.

The problem with Keyera is that success is now reflected in the share price. I’ll look to raise the buy target again when management lifts the payout, which could happen later this year. In the meantime, Keyera is a buy on dips to USD42 or lower.

Northern Property REIT (TSX: NPR, OTC: NPRUF) is facing a challenge deploying funds from the sale of its senior care facilities, which it’s sold to comply with a ruling that effectively ended the tax advantages of Canadian income deposit securities.

On the plus side, the REIT has plenty of financial firepower to absorb the hit to cash flow to maintain financial strength and the distribution as it finds places to put its cash.

On the minus side, the effort is probably going to delay a distribution increase until next year. Consequently, I don’t advise paying more than my target of USD30, even though this is one of the most solid outfits in its sector.

Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) did take a hit to earnings from the drop in NGLs prices this year, as it absorbed the assets of the former Provident Energy Ltd. The stock, however, felt relatively little impact, as finances and the dividend remained secure and management stuck to guidance for 3 percent to 5 percent annual dividend growth.

Looking ahead, Pembina will reduce its commodity price exposure from the Provident assets. More important, however, those assets have positioned the company for growth in every important area of Canada’s energy patch, from tar sands to shale gas and NGLs.

The stock was too expensive earlier this year when it broke USD30 for the first time. But it’s headed a lot higher than that in coming years as it adds assets and raises cash flows and dividends. The stock is in the red by about 3 percent year to date, but my buy target remains USD30 or lower for those without a stake.

RioCan REIT (TSX: REI, OTC: RIOCF) has returned about 17.6 percent this year, mostly on the strength of the perception that it’s the ultimate safe stock. That high quality is definitely borne out in the numbers, which are likely to look stronger going forward now that the company has dissolved its partnership with Cedar Realty Trust Inc (NYSE: CDR) in the US.

Under the deal’s terms Cedar will sell its 20 percent stake in 21 properties to RioCan, and the latter will sell its 80 percent stake in one property. RioCan will wind up with a portfolio of 25 retail properties in the northeastern US as well as 9.4 million shares of Cedar, though it will no longer hold a seat on the board. RioCan’s purchases will cost it USD120 million, offset by USD60 million from the sale of the single property to Cedar.

The real catalyst for rising value at RioCan will be a distribution increase, which management says could happen by the end of the year. When that happens, I’ll raise my buy target. Until then, RioCan is a buy on dips to USD25.

Shaw Communications Inc (TSX: SJR/A. NYSE: SJR) has returned a little better than 7 percent since we added it to the Conservative Holdings in January. That’s roughly the kind of return I was expecting when I added this stable cable television and broadband service provider, though it follows a period of uncharacteristic volatility for the stock.

Investors can expect another dividend increase in January 2013 in the 5 percent range. In the meantime, the monthly dividend of not quite 5 percent is very safe. My buy target for Shaw remains under USD22, and it’s comfortably in that range now.

Student Transportation Inc (TSX: STB, NSDQ: STB) isn’t expected to announce its fiscal 2012 earnings until around Sept. 21. That’s the result of full-year results being a more complex task to compile than quarterlies.

Unfortunately, the delay has left plenty of time for rumor and innuendo to make mischief in the marketplace, and the stock has been quite volatile as a result. To be sure, we won’t have a real grasp of how the provider of school bus services is doing until it does post the numbers, and all investors should be willing to change their mind if it’s warranted.

The purchase of a 10 percent stake in the company by Caisse de depot et placement du Quebec, however, should set investors’ minds at ease in the meantime. So should the continuing purchases of the stock by insiders, who have increased their holdings of the company by 5.7 percent the past six months.

The stock has returned roughly 10 percent this year. My buy target for Student Transportation remains USD7 or lower for those who don’t already own it.

TransForce Inc (TSX: TFI, OTC: TFIFF) is still the biggest 2012 winner in the Conservative Holdings, with a total return of 45 percent-plus. Most of that’s due to gains achieved early in the year, though the stock did trade close to USD20 a share briefly last month.

The retreat we’ve seen since then may have been caused at least partly by the decision of major owner Jolina Capital to sell half its stake in TransForce, taking its ownership stake down to 8.4 percent. That move appears more of a cash-in than a cash-out.

My contention in recent months has been the stock is ahead of itself and would only rate a buy on dips to USD17, at least until next spring when management will likely announce another substantial dividend increase.

That opinion appears to be vindicated by recent trading, though we’re not quite there in terms of value. Wait for a dip to USD17 to buy TransForce if you haven’t yet.

Aggressive Holdings

Acadian Timber Corp (TSX: ADN OTC: ACAZF) has emerged as the second-best Aggressive Holding in 2012, posting a total return of better than 30 percent so far. That’s a bit surprising, considering global timber markets remain somewhat constrained by Europe’s weakness and the threat Asian demand will dip.

But company earnings have been solid and supportive of the dividend, and it also enjoys the support of Brookfield Asset Management.

Acadian is still slightly below my buy target of USD13. I wouldn’t pay more, particularly since we’ve had such a long-lived opportunity to buy below that–even well below that–this year.

Ag Growth International Inc (TSX: AFN, OTC: AGGZF) is in the red by about 6 percent this year. The stock started out hot but has seen some vicious selling since late spring on concerns about the US drought on its earnings.

That a reduced harvest will cut into Ag’s second half 2012 profit is all but certain, as the US contributes more than half of the company’s income. Ag Growth, however, is hardly a one trick pony, and many investors appear to be ignoring the strong results it’s posting outside North America as well as the strong improvement in Canada from what’s ironically been much better weather than last year.

No fewer than four analysts covering the stock downgraded it last month, versus one upgrade. Ironically, that came after the stock’s retreat this year, which likely amounts to face saving attempts by those with egg on their face.

For our purposes, Ag Growth is still a very vibrant company with a franchise set to rebound on a return to normal weather. And that will likely wipe out any losses we’ve seen of late. I continue to rate the stock a buy up to USD45 for those who don’t already own it.

ARC Resources Ltd (TSX: ARX, OTC: AETUF) has lost about 1 percent year to date. That too belies an extremely volatile year, as the oil and gas producer has followed energy prices up and down sharply. Fortunately, the one constant of this year have been rising production and reserves.

The company’s successful debt and equity financing last month is another factor separating it from the vast majority of its peers in the oil and gas sector and provides plenty of funds to keep development going in what’s still a fairly weak pricing environment.

ARC’s not immune from energy price ups and downs. But with two-thirds of current output coming from natural gas–on which the company currently makes almost nothing–there’s huge upside as well as downside protection. All that makes ARC a buy up to USD26 and the very conservative investor’s top choice among the energy producers.

Chemtrade Logistics Income Fund (TSX: CHE, OTC: CGIFF) is up close to 20 percent this year, despite clear exposure to the global economy’s health at its sulfuric acid business. The reason is management’s extremely conservative dividend policy that was basically designed to weather everything from bad pricing to production and supply interruptions.

The downside is management isn’t likely to boost the distribution anytime soon. But it does make the stock a reasonably high-percentage bet on any dip to USD15.50 or lower.

Colabor Group Inc (TSX: GCL, OTC: COLFF) is one of the Portfolio’s bigger losers, dropping 13 percent of its value this year including dividends. I say that because it’s one of two Holdings to actually shave its dividend this year, which is usually a reason for me to sell.

I didn’t pull the trigger on Colabor–and in fact have elevated it to a buy again up to USD10–because the company laid out a strategic plan at the time of the cut to keep its business plans on track. Second-quarter numbers demonstrated it’s still meeting that guidance, and so I’ve stuck with it.

We’ll get another look at how things are going, probably sometime in mid-October, and an opportunity to decide if we still want to own this stock. For now, however, it rates a buy up to USD10 for aggressive investors who don’t already own it.

Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) is slightly underwater for the year with a negative total return of about 1.9 percent.

The company, however, actually raised its second-quarter funds from operations–the key measure of profitability–by 4 percent, as a 47 percent lift in mostly oil production more than offset a 17 percent drop in realized selling price for oil and a 50 percent slide in natural gas.

Further, management announced it was on target to meet full-year goals for output and cash flow, and the company was able to do a successful equity financing to boot.

That’s certainly no ordinary achievement for an energy company this year. I continue to rate Crescent Point a buy up to USD48 in an uncertain year for oil.

Extendicare Inc (TSX: EXE, OTC: EXETF) is actually in the black this year by about 5 percent. That’s remarkable considering the job management has had to do to reorient its US portfolio in the wake of the cut in Medicare reimbursements.

One measure of the company’s success is the up-sizing of its recent offering of a 6 percent convertible bond due Sept. 30, 2019, to CAD110 million, with the proceeds to be used to pay off a bond due Jun. 30, 2013, and paying out 7.25 percent. That move will save cash as well as eliminate all refinancing risk until June 2014.

There are still some challenges ahead, not the least of which is another potential cut in Medicare across the board. But management is dealing with them and holding its dividend in the process. The stock’s a buy up to USD9 for aggressive, patient investors.

Newalta Corp (TSX: NAL, OTC: NWLTF) has tacked on another 16 percent this year, despite some ups and downs in Canada’s industrial and oil sectors. The reason is this company is gaining scale and shifting its focus to fee-generating operations that lessen its exposure to commodity price swings.

I’ve stuck with this stock over the years largely because I’ve felt that so long as it was building its franchise it would eventually be rewarded in the stock market. We’ve still got a ways to go before the stock returns to its October 2006 high in the mid-30s, reached just before Finance Minister Jim Flaherty’s Halloween announcement of a tax on income trusts.

But the business is arguably much more valuable now than it was then and the company is growing. Buy up to USD15 if you’re aggressive, patient and haven’t yet established a position.

Noranda Income Fund (TSX: NIF-U, OTC: NNDIF) is down about 4 percent this year, slightly less than that from our entry point last year. The primary reason is that the battle between management and major shareholders over the dividend still hasn’t been resolved.

The company, however, has made great progress paying down debt, as cash has continued to flow from the zinc refinery that contributes all of its revenue. That’s also increasing the value of the company as well as the security of what’s already a 10 percent dividend.

The lack of a deal yet on the payout likely means the payoff from this one won’t come as fast as I once hoped.

But I am content to hold on as the business gains value, and the stock is a solid speculation up to USD6.

Parkland Fuel Corp (TSX: PKI, OTC: PKIUF) is our biggest winner thus far in 2012 among the Aggressive Holdings, with a total return of 44.7 percent.

It’s kind of hard to believe that performance, considering where the stock was this time last year.

But the better than double from that point is the best possible testament to why it makes sense to follow companies as businesses rather than buy and sell based on price momentum.

The question now is whether or not this stock, which is at an all-time high, has much more left in the tank for further gains. The numbers certainly do indicate management’s plans for growth have succeeded and that there’s much more to come.

I’m not moving the buy target above USD13, however, until there’s an increase in the dividend. In fact, this may be a good time for those who bought at the bottom last year to take a partial profit, if the stock has become a disproportionately large slice of a portfolio.

Pengrowth Energy Corp (TSX: PGF, NYSE: PGH) did cut its dividend this year from CAD0.07 to CAD0.04 per month. That wasn’t quite as severe as the 50 percent reduction at the company it replaced, Enerplus Corp (TSX: ERF, NYSE: ERF).

But in the end the company’s exposure to falling oil prices this spring–as it tried to integrate the assets of the former NAL Energy Corp–proved almost as destructive to cash flow as crashing natural gas and oil did to Enerplus.

In recent weeks many investors have asked me if they shouldn’t switch back to Enerplus, and with the recent run-up in that stock it looks like some definitely have done so. My advice, however, is still to stick with Pengrowth.

For one thing, the company is rich in oil after the NAL deal, and oil is going to be a stronger priced commodity at least until significant liquefied natural gas export capacity is constructed in North America.

For another, it has substantial untapped credit lines with which to carry through its oil and liquids development. Finally, the stock has rebounded from its lows but is still very cheaply priced relative to its reserves.

In retrospect, I shouldn’t have immediately bought Pengrowth to replace Enerplus, as we’re sitting with a loss of about 23 percent. But at this price, and with the upside from oil alone, I’m content to hold it and again rate the stock a buy for new investors up to USD7, a target that reflects the dividend cut.

PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF) is off about 15 percent from when I added it to the Aggressive Holdings in place of Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE).

Here too, however, I’m content to hold on for recovery. The drop in the stock is due entirely to volatility in oil prices. Meanwhile, the company itself has successfully executed on its plans to increase production (light oil up 10 percent) and cut operating costs (down 12 percent per barrel of oil equivalent).

Ultimately, increasing reserves and production is how oil and gas companies build shareholder wealth, even as energy prices fluctuate. By this measure PetroBakken is well on its way to eventually being a big winner for us. Buy up to USD18 if you haven’t yet.

Note the company is still half owned by Petrobank Energy & Resources Ltd (TSX: PBG, OTC: PBEGF), which I don’t track in How They Rate. Some investors have expressed concerns Petrobank will dump its shares on the market all at once, depressing PetroBakken shares. If so, however, it would hurt its primary asset.

Rather, if Petrobank does sell, it will be gradually to fund other operations. PetroBakken’s fate lies with how well it executes its production strategy, and how strong oil prices are as it does so.

Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) is off by about 9 percent this year, again hardly a shocker considering the generally poor performance of natural gas prices (natural gas accounts for 89 percent of company output). The company, however, is still increasing reserves and production (up 15 percent per share in the second quarter) from some of the lowest-cost and most prolific lands in Canada.

Moreover, despite the poor performance of gas the stock is still trading above my buy target of USD20. That’s still the target I’d shoot for.

PHX Energy Services Corp (TSX: PHX, OTC: PHXHF) is off about 18.5 percent this year including dividends, the result of a protracted decline that began soon after the release of fourth-quarter 2011 earnings. The stock has basically been range-bound around USD8 per share since, despite posting generally solid results.

The weak performance appears to be due to two things: worries about the future of global oil and gas prices and the impact on drilling, and concerns about the cost of the company’s expansion effort outside North America, which at times has required renting equipment from third parties.

Getting customers globally has been more important than boosting margins at least to date. Success going forward, though, will depend on doing both.

At this point the dividend appears well protected by cash flow. But I will be watching this one closely. And only patient aggressive investors who have not yet bought should take positions up to USD14.

Vermilion Energy Inc (TSX: VET, OTC: VEMTF) is basically flat since I featured it last month as a Best Buy, and it’s up roughly 5 percent this year.

The company remains very much on target with its long-run strategic goals, with some executives hinting dividend growth could occur as soon as 2014.

In the meantime, with a growing global portfolio of low-risk properties, Vermilion is a great way to bet conservatively on oil and gas. It’s a buy up to USD50.

Wajax Corp (TSX: WJX, OTC: WJXFF) is a new recommendation. See the September Best Buys for more. Buy up to USD45.

Stock Talk

Comments Guidelines

Add New Comments

You must be logged in to post to Stock Talk OR create an account