Coverage Changes

We’re adding four more companies to How They Rate coverage this month, three to the Oil and Gas section, Argent Energy Trust (TSX: AET-U, OTC: ANGYF), Eagle Energy Trust (TSX: EGL-U, OTC: ENYTF) and Parallel Energy Trust (TSX: PLT-U, OTC: PEYTF), and one to Electric Power, Crius Energy Trust (TSX: KWH-U, OTC: None). All four were profiled in the February Canadian Currents and start out as holds.

There are no deletions from How They Rate coverage this month. But CNOOC Ltd (Hong Kong: 883, NYSE: CEO), the listed subsidiary of China National Offshore Oil Corp, has completed its takeover of Nexen Inc for CAD27.50 per share in cash. The deal was completed March 1, and shareholders of the former Nexen should be receiving their cash very shortly, if they haven’t already.

Also note that trading in Poseidon Concepts Corp (TSX: PSN, OTC: POOSF) has been halted as of Feb. 15. The latest update from the company is the interim chief financial officer and former CFO have now both stepped down, per the mandate of the Special Committee. My advice is still to sell Poseidon Concepts at the first available opportunity.

Advice Changes

A&W Revenue Royalties Income Fund (TSX: AW-U, OTC: AWRRF)–To Hold from Buy @ 22. Same-store sales were healthy in the fourth quarter, but taxes have taken the payout ratio up to 115 percent of distributable cash flow. It’s time to be a bit cautious.

Atlantic Power Corp (TSX: ATP, NYSE: AT)–To Hold from Buy @ 11. Management’s dramatic shift in strategy has hardened the company against a weak North American power market. But the company needs to meet some benchmarks (see Dividend Watch List) before it’s worthy of new money.

Bonvista Energy Corp (TSX: BNP, OTC: BNPUF)–To Hold from Buy @ 15. Fourth-quarter results were solid but not inspiring. This company needs higher natural gas liquids prices.

EnerVest Energy & Oil Sands Total Return Trust (TSX: EOS-U, OTC: EOSOF)–To Hold from SELL. The fund’s portfolio has apparently shifted to a more conservative mix of undervalued companies.

Exchange Income Corp (TSX: EIF, OTC: EIFZF)–To Buy @ 28 from Hold. Strong fourth-quarter results and an accretive acquisition announced last month earn this new How They Rate entry a “buy” rating.

Manitoba Telecom Services Inc (TSX: MBT, OTC: MOBAF)–To SELL from Hold. Fourth-quarter results showed erosion in the company’s wireless business for the first time.

Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–To Buy @ 5 from Hold. Fourth-quarter results demonstrated for the first time the success of the company’s transition to oil-weighted production. The dividend appears well covered by cash flow even at very low natural gas prices.

Wajax Corp (TSX: WJX, OTC: WJXFF)–To Hold from Buy @ 45. Fourth-quarter profit covers the dividend but showed the strain of reduced drilling in western Canada. Management is counting on a strong second half 2013.

Ratings Changes

A&W Revenue Royalties Income Fund (TSX: AW-U, OTC: AWRRF)–To 4 from 5. The payout ratio rose to 115 percent of distributable cash flow, as taxes took a sharper bite.

Atlantic Power Corp (TSX: ATP, NYSE: AT)–To 2 from 4. Fourth-quarter numbers were actually in line with the previous forecast. But details in the 2013 guidance cloud future earnings visibility, at least until certain benchmarks are met.

Barrick Gold Corp (TSX: ABX, NYSE: ABX)–To 3 from 4. The CAD3.8 billion writedown of the company’s copper assets is definitely a stumble and clouds the future outlook, despite still massive margins on gold sales.

Dundee Industrial REIT (TSX: DIR-U, OTC: DREUF)–To 5 from 4. The REIT’s first distribution increase in its brief history provides strong visibility on future results and earns the company a Safety Rating System point.

Manitoba Telecom Services Inc (TSX: MBT, OTC: MOBAF)–To 3 from 4. Shrinking wireless revenue diminishes future earnings visibility for this company, which last cut its dividend in August 2010.

Wajax Corp (TSX: WJX, OTC: WJXFF)–To 2 from 3. The company loses a point for its payout ratio, which rose to 96 percent in the fourth quarter of 2012.

Yellow Media Ltd (TSX: Y, OTC: YLWDF)–To 1 from 0. The company’s emergence from managed bankruptcy means it no longer has debt coming due between now and the end of 2014.

Safety Ratings

The core of my selection process is the six-point CE Safety Rating System, which awards one point for each of the following. A rating of “6” is the safest:

• Payout Ratio–A ratio below our proprietary industry baseline.
• Earnings Visibility–Earnings are predictable enough to forecast a payout ratio below our proprietary industry baseline.
• Debt-to-Assets Ratio–A ratio below our proprietary industry baseline.
• Short-Term Debt Ratio–Debt due in next two years is less than 10 percent of market capitalization.
• Business Stability–Companies that can sustain revenues during recessions are favored over more cyclical ones.
• Dividend History–No dividend cuts over the preceding five years.