Canadian Edge has two model Portfolios. The Conservative Holdings are chosen for their ability to pay consistent and rising dividends over time, thanks to healthy and growing underlying businesses that have proven they can prosper even in the most volatile and dangerous environments.

My Aggressive Holdings, in contrast, are basically there because of outsized total return potential, either because of strong positions in key natural resource sectors or a special situation with big upside.

I’m willing to take more risk for greater potential reward.

Unlike Conservative Holdings, Aggressive Holdings’ stock prices can be deeply affected by economic events. I’m willing to hold them through the volatility so long as they remain solid as businesses. Obviously, a company that sells oil will see its earnings drop if black gold takes a tumble.

What’s important, however, is whether the producer can manage the lower prices and eventually turn them to its advantage. So long as that appears probable, I’ll stay with them.

Which Portfolio investors choose to focus on should depend on the ability to absorb risk in pursuit of potential reward. For the most conservative, this sort of tolerance will be quite low, and they should stick largely to Conservative Holdings.

Most investors, however, will want to hold stocks from each portfolio, always in a rough balance with each other.

This way we’re protected against a cratering of one particular stock and are always in the game for potentially explosive returns, particularly when less-than-optimal conditions improve.

One way to build a portfolio of CE stocks this way is simply to buy the two High Yield of the Month picks in each issue.

These are typically drawn one from the Conservative Holdings and one from the Aggressive Holdings.

That’s the case this month, with Conservative Holding Keyera Corp (TSX: KEY, OTC: KEYUF) paired with Aggressive Holding Acadian Timber Corp (TSX: ADN, OTC: ACAZF).

Gas’ Sudden Impact

This year’s biggest market event by far for both Canadian Edge model portfolios has been the titanic crash in natural gas prices.

Gas has basically been in a downtrend since peaking in the mid- to high teens in the wake of hurricanes Katrina and Rita inn 2005. Then came the quantum leap in drilling technology that made hydraulic fracturing possible, and production has been off to the races ever since.

As this month’s Feature Article makes clear, however, the drop we’ve seen since summer 2011 is different from what came before in one crucial respect: For the first time gas prices are below the cost of producing the fuel for many companies.

“Netbacks” for many producers have shrunk close to zero even for lower-cost producers, particularly in Canada, where transportation problems have combined with very mild winter weather to shoot gas as low as CAD1.50 per million British thermal units in Alberta during the first quarter.

The results have come as suddenly for companies as they’ve been devastating. Several producers have sunk perilously close to bankruptcy, including former Aggressive Holding Perpetual Energy Inc (TSX: PMT, OTC: PMGYF), which remains a strong sell. And we’re likely to see more companies succumb, given the first-quarter results we’ve seen so far.

The good news is, at least so far the current Aggressive Holdings appear to be managing the crisis as well if not much better than could have been expected.

As I highlight below ARC Resources Ltd (TSX: ARX, OTC: AETUF) and Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–which I swapped into last month in place of now-sold Enerplus Corp (TSX: ERF, NYSE: ERF)–have both reported first-quarter results that support dividends and production plans, despite a steep drop in netbacks from the sale of natural gas.

Perhaps more impressively, PHX Energy Services Corp (TSX: PHX, OTC: PHXHF) released record numbers for revenues and cash flow in the first quarter, as its expansion overseas and focus on drilling for liquids more than offset the loss of natural gas drilling business. The company has in fact increased its planned capital spending for 2012 due to greater-than-expected demand.

Because their underlying businesses are so resilient, all three continue to rate strong buys, ARC Resources up to USD26, Pengrowth up to USD10 and PHX Energy Services up to USD14.

We’re actually up very slightly in Pengrowth from last month’s recommendation. That’s a 10 percentage point outperformance of Enerplus over that time. And there’s a real risk that gap will widen significantly, unless Enerplus is able to pull a rabbit out of its hat when it reports first-quarter results on or about May 14.

ARC and PHX, however, were off 13.1 and 4.3 percent, respectively, this year before they announced earnings. That’s a clear sign investors remain deeply skeptical and fearful of any company with exposure to natural gas prices and increasingly to the possibility of a resumed global economic decline.

Not surprisingly, the same dark cloud is currently hanging over many other Aggressive Holdings. The worst performer to date is still Colabor Group Inc (TSX: GCL, OTC: COLFF), the result of the 33 percent dividend cut announced in March with the release of disappointing fourth-quarter earnings.

Colabor’s first-quarter results are highlighted below as well. There was enough improvement, in my view, to keep the stock in the Portfolio but not enough to upgrade it to buy-status once again.

Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) has seen a slight recovery in recent weeks as gas prices have bottomed.

But it remains the second-worst performer and a hold until we see how tumbling gas prices affected first quarter results. That should happen at the end of next week, though the company has a history of reporting numbers unexpectedly.

In all, half a dozen of the 15 current Aggressive Holdings are up more than 10 percent for the year, with Newalta Corp (TSX: NAL, OTC: NWLTF) posting better than a 20 percent return. But another half dozen are underwater for the year. And of the dozen still rated buy, eight trade below my buy targets.

Chasing the Conservative

That’s a sharp contrast with the Conservative Holdings, where only eight of 20 companies rated buy are still selling below target. And most of the buys are selling for only a few cents below.

Only one current Conservative Holding–High Yield of the Month Keyera–is actually down for the year. And that’s mainly due to the unwinding of a parabolic rise in the share price to an extreme overvalued level in late 2011.

Meanwhile, 10 recommendations are up double digits, and six are up by more than 20 percent. TransForce Inc (TSX: TFI, OTC: TFIFF), whose robust first-quarter earnings are highlighted in the Apr. 26 Flash Alert, is actually higher by nearly 45 percent.

That’s a huge disparity of trading between Aggressive and Conservative holdings thus far in 2012. The question is, can we expect more of the same the rest of the year and into 2013?

The premise of owning Aggressive Holdings is to score larger returns than the Conservative Holdings. But in the current environment the latter have demonstrated superior returns and better reliability. If that’s to be a permanent state of affairs, it’s clear we’re better off focusing on them and leaving the Aggressive Holdings to the bold and foolish.

It’s true that Conservative Holdings do also provide a natural resource play, by virtue of being priced in and paying dividends in Canadian dollars. The loonie has burst above parity once again with the US dollar, following last month’s statements by the country’s central bank that its economy is on quite solid footing. Over the long term it benefits from Canada’s resource bounty, of which exports to Asia are only starting to ramp up.

But it would be a major mistake to eschew the Aggressive Holdings and hold only Conservative Holdings, with the exception of investors who want to take the least chances possible.

The main reason is the disparity this year isn’t so much based in actual business performance but on investor perception of what will happen on the ground be in the future.

Fear of Risk

Rarely have so many investors been so afraid of losing money, particularly after the markets have posted three such solid years. That’s the legacy of the 2008 crash and the fear of a potential reprise it left behind.

I can talk myself blue in the face about how companies that held it together as businesses have recovered their stock market losses of 2008 and much more over the past three years. But the vast majority of questions I get from readers right now still fall into two main categories.

One is whether a drop in a particular stock means they should sell. The other focuses on why my buy targets for certain stocks set so low and whether the questioner can’t just go ahead and pay more.

These are basically two sides of the same coin. Many income investors–much like tech stock buyers in the late 1990s–have adopted what amounts to a strategy based on momentum.

The more a stock rallies the more confidence it engenders in investors. The fewer owners will consider selling, and the more who don’t own it will buy. Many who do own rising stocks will keep buying as it climbs.

In this way, rising stocks keep on rising, without regard to underlying business growth or even yield, which shrinks the higher stock prices go.

Conversely, when a stock starts to drop from a recent high speculation stirs that something is wrong at the company. Prime candidates for such a reversal of sentiment are stocks that have been bid up on positive momentum.

A good example is Keyera Corp, which shot up last year as investors seemed to think it couldn’t lose in the natural gas liquids infrastructure company. This year the company has continued to advance its profitability. But its share price has collapsed even more dramatically than it rose.

Hopefully, some Canadian Edge readers took advantage of the pop up in Keyera to take some profit off the table, as I advised. But whether you did or not, Keyera is still a first-rate company with a bright future as it invests to grow in what’s fundamentally a low-risk business. And those who bought it at USD50-plus are no doubt fearful and licking their wounds at this point. It’s again a solid buy, trading below my buy target of USD42.

Stocks that have dropped this year or that trade well below buy targets are the victims of momentum and perception. But that doesn’t mean they’re not real values with the potential for big-time returns going forward. And so long as they do have those strengths, lower prices indicate it’s time to buy, not sell.

Of course, as I’ve written many times in Canadian Edge, I view averaging down in a falling stock as just a disastrous strategy as loading up on a rising stock to catch the momentum. Sure, some people do it effectively. But in doing so they’re essentially loading their portfolios up on a single situation. And if events go sideways a relatively small loss in a single stock can quickly blow a hole in your portfolio.

Worse, inflating a stock to such a large slice of your investment has the potential to make you emotional. And that makes you much more vulnerable to irrational and all too often ruinous decisions. After all, even the strongest looking company can stumble.

How those inevitable setbacks affect you, however, depends on your response to them. And being emotional is the surest way to turn a small loss into an unrecoverable one.

However, there’s a big difference between really loading up on a falling stock and simply sticking with one that has already fallen–or, better, to buy a stock that’s fallen that you don’t already know. The key as always is the strength of the underlying business. So long as that’s solid, even the worst-performing stock will rebound when conditions improve. And owning them when they do is how you’re going to get your biggest returns.

The bottom line is, despite the underperformance of the Aggressive Holdings this year all but the most conservative should still own some of them. Conversely, don’t chase the Conservative Holdings above buy targets just because they seem like they’ll never come back down.

All you have to do is look at a chart of the last year of performance of stocks in both portfolios to see how the winds of investor sentiment change and how radically they affect prices. Keep your focus on underlying businesses and the returns they can generate through growth and dividends. That’s how you’ll know when there’s genuine value and when perception-led momentum has temporarily distorted prices.

Over the next couple weeks, we’ll get first quarter numbers for almost all Canadian Edge Portfolio Holdings. I’ll be looking at all the usual sign posts, from dividend coverage to debt and the growth of key operations. Based on the dozen we’ve seen to date, it’s so far so good. But if any falter we’ll move along.

Two companies yet to report but that had news worthy of note are EnerCare Inc (TSX: ECI, OTC: CSUWF) and Northern Property REIT (TSX: NPR-U, OTC: NPRUF).

Northern has announced a deal with HealthLease Properties REIT–soon to launch its own initial public offering–to sell its seniors facilities for CAD160 million, including CAD93.2 million in assumed debt.

This deal is expected to close in mid-June and would eliminate the company’s earnings exposure to Canada’s rules for real estate investment trusts as well as staple shares combining debt and equity into a single security.

We’ll know more when Northern reports first-quarter results on May 9. But in the meantime, the REIT is a buy on dips to my buy target of USD30 or lower.

EnerCare’s management has apparently headed off the hostile intentions of private capital firm Octavian Advisors LP and its allies. In a 55 percent-to-45 percent vote, shareholders re-elected all of management’s slate of directors over rivals proposed by Octavian.

The key was overwhelming support of retail investors, who rejected Octavian’s plan to load the company with debt to fund a dividend expected to be as high as 25 percent. That keeps the company’s current management in place and preserves its invest-to-grow strategy.

Octavian’s effort to force a sale of the company when the share price was barely CAD5 really did call into question its knowledge of this business regarding value.

Although management has definitely stumbled in the past, the current formula is definitely working for income investors, as the company grows its waterheater rental and submetering business and ramps up dividends.

Equally, however, our mission here is total return. And if Octavian and its allies really do convince another player to bid decently for EnerCare, we all need to take notice and weigh our options. That clearly wasn’t worth our while in this case. But when it comes to investing, having an open mind is critical. EnerCare is a buy on dips to USD10.

The Numbers

Here are when Canadian Edge Portfolio Holdings have reported or will report their first-quarter 2012 numbers, including the three highlighted in an Apr. 26 Flash Alert, High Yield of the Month Acadian Timber Corp (TSX: ADN, OTC: ACAZF) and six others reviewed below.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Apr. 26 Flash Alert
• Artis REIT (TSX: AX-U, OTC: ARESF)–May 9 (confirmed)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–May 7 (confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Jun. 1 (estimate)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPUF)–May 7 (tentative)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–May 9 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–May 10 (confirmed)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–May 8 (confirmed)
• Dundee REIT (TSX: D-U, OTC: DRETF)–May 4 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–May 9 (estimate)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–May 11 (confirmed)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–May 14 (confirmed)
• Just Energy Group Inc (TSX: JE, OTC: JUSTF)–May 18 (estimate)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–May 8 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–May 9 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–May 4 (confirmed)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–May Portfolio Update
• Shaw Communications Inc (TSX: SJR/B, NYSE: SJR)–Apr. 26 Flash Alert
• Student Transportation Inc (TSX: STB, OTC: STUXF)–May 11 (estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–Apr. 26 Flash Alert

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–May High Yield of the Month
  
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–May 11 (confirmed)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–May Portfolio Update
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 9 (confirmed)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–May Portfolio Update
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–May 11 (estimate)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–May 8 (confirmed)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–May 8 (confirmed)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Jun. 14 (estimate)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–May 8 (confirmed)
• Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–May Portfolio Update
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–May Portfolio Update
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–May 11 (estimate)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–May Portfolio Update
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–May 7 (estimate)

ARC Resources Ltd (TSX: ARX, OTC: AETUF) relies on natural gas for roughly two-thirds of its overall output. So it’s no surprise that investors have treated the stock roughly this year, as natural gas prices have skidded.

Once again, however, the company showed its flexibility in tough markets, even while maintaining potential for massive upside when gas prices eventually rebound. As I note in this month’s Feature Article, this may take some time, and investors will have to be patient. But ARC is on very steady ground.

First-quarter funds from operations (FFO)–the metric management uses to gauge dividends–did slip 8.8 percent from last year’s level. But FFO still covered the distribution comfortably, as ARC posted a payout ratio of 48.4 percent. This was despite a 34.1 percent decline in realized selling prices for natural gas to CAD2.67 per million British thermal units. The company scored healthy increases in production of natural gas (up 43.3 percent), light oil (11.5 percent) and condensate (28.5 percent), offset by a 14.2 percent drop in natural gas liquids.

Overall production was up 28.5 percent on a barrels-of-oil-equivalent basis. That reflects the successful development of the company’s properties at the Pembina and Goodlands properties as well as the startup of a gas processing facility at Ante Creek. The company also cut its operating costs per barrel of oil equivalent by 13.8 percent.

Management did announce it would reduce capital spending by CAD160 million to CAD600 million for 2012, to reflect the lower gas prices. And it held out the possibility of a cut in output later this year, should gas prices remain depressed. But it also reaffirmed full-year production guidance of 90,000 to 95,000 barrels of oil equivalent per day.

Revenue will be further safeguarded by the fact that the company derived 77 percent of its revenue from liquids in the quarter. More protection is gained through an active hedging plan, with 60 percent of gas output hedged the rest of the year at USD3.75 per million British thermal units.

All in all, these results are solid enough to reaffirm ARC Resources as a buy up to USD26 for those who don’t already own it.

Colabor Group Inc (TSX: GCL, OTC: COLFF) CEO Claude Gariepy stated during  the food and related products distributor’s first-quarter conference call that results were “slightly” below expectations. The key reason cited, however, was the cost and effort involved in restructuring efforts designed to “achieve profitability without delay.” These are basically changing the corporate structure to reflect geographic lines and achieve synergies and cost cutting goals.

When the company reduced its dividend in March, management stated an expectation that earnings would be showing a decided improvement in the third quarter, with more benefits accruing thereafter. Mr. Gariepy and CFO Michel Loignon largely stuck to this guidance, and the numbers generally backed them up, despite what they referred to as continued difficult conditions in the industry.

Cash flow per share was flat at CAD0.14 in the first quarter versus year-earlier levels. Sales rose 24.4 percent, cash flow was up 11.3 percent and net earnings were 4.9 percent higher. The key was acquisitions, including the purchases of Viandes Decarie Inc, which closed Jan. 1, 2012, Skor Food Group, completed May 9, 2011, and Edfrex Inc, official as of Mar. 30, 2011), along with a full quarter’s contribution of Les Pecheries Norref Quebec Inc.

More encouraging, however, was another quarter of growth in comparable sales (excluding acquisitions) of 1.1 percent. That’s a good indication the company is holding its market share in a tough environment. That included positive contributions at both the Distribution (up 0.4 percent) and Wholesale (up 2.8 percent) divisions.

Overall Wholesale division revenue was up 15.1 percent, while Distribution was up 28.4 percent. January, in Mr. Garipy’s words, was “very difficult,” February was “better” and March was “excellent.”

The company did announce that it will lose a contract in Ontario that would have generated CAD85 million of revenue next year. That’s no fault of its own, as the severing of the relationship was part of a contract change by a UK firm of which Canada was only 10 percent of revenue.

The contract’s profitability was also marginal, so the impact on cash flow shouldn’t be great. But it does demonstrate the somewhat uphill battle this company faces right now in executing its plan to consolidate its industry.

On the plus side, Colabor is No. 1 in market share in Quebec and in the top three for Ontario. The company’s valuable contract with Sobeys for fish supply has been renewed with a duration reaching until late this decade, and it reports progress signing on other customers to long-term contracts. That ensures revenue going forward, which gives the company more opportunity to further extend its reach.

The payout ratio for the last 12 months at the old dividend rate was 86 percent. At the lower rate, however, it’s only 63 percent and is moving toward the company’s goal of 50 percent. As for debt reduction, the company has now drawn CAD120.6 million on its CAD150 million credit facility. But its bank syndicate has amended its terms to give it time to cut debt, and it appears on course to do so as the year unfolds.

These are all very positive signs for Colabor, certainly enough reason to keep holding the stock, despite the recent dividend cut. In my view, however, they’re not good enough to elevate the stock to buy again. Colabor Group is a hold.

Pengrowth Energy Corp (TSX: PGF, NYSE: PGH) saw its first-quarter funds from operations hit by 38 percent but still covered its distribution comfortably with a payout ratio of 67.7 percent.

Equally important, that was with natural gas producing just 2 percent of netbacks, despite still accounting for more than half of actual output.

I made the switch from Enerplus to Pengrowth last month because I thought the latter better able to handle the pressure of falling natural gas prices.

These results are right in line with my expectations, as overall production levels were up 3 percent and the company continued its tilt toward liquids production and away from natural gas. This process will be accelerated by the merger with NAL Energy Corp (TSX: NAE, OTC: NOIGF), which looks set to close later this month.

The company injected its first steam into its Lindbergh steam-assisted gravity drainage (SAGD) oil sands pilot. This project is both on time and on budget to produce up to 30,000 barrels of oil equivalent per day for 25 years.

Overall production was 75,618 barrels of oil equivalent per day in the first quarter and will reach close to 100,000 with the merger. The combined company will refocus efforts on liquids production, reducing capital spending by the amount of NAL’s current total–shaving CAD200 million off what the pair planned to spend as separate companies. The company plans major forays into the liquids rich Elkton formation in Western Canada as well as an acceleration of its SAGD projects.

Pengrowth has CAD943 million in credit facilities left on a three and half year agreement. And it’s identified CAD150 million in asset divestitures to further fund its development plans. Coupled with strong income from the liquids production already, that provides a lot of backing to CEO Derek Evans’ pledge that the company will only consider cutting the dividend if gas sinks less to less than CAD1.50 per million British thermal units and stays there for the better part of the year. That’s a sizeable cushion from the current selling price, even in Alberta.

The upshot is Pengrowth’s payout looks solid under all but the most extreme conditions. And more important, the company is in great position to profit long-term from rising output of a commodity that’s increasingly scarce on global markets, light oil. Buy Pengrowth up to USD10 if you haven’t yet.

PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF) kept its positive momentum going in the first quarter, boosting average daily output by 12 percent to 46,722 barrels of oil equivalent per day. Funds from operations per share rose by 7 percent from year-ago levels, as increased output in key light oil areas offset the loss of production from properties the company has divested.

The results are actually a bit better than what management had guided to early last month. The quarter basically unfolded favorably weather wise in January and February but was tempered by an early spring breakup season in March. Road bans also cut output marginally in March.

The difference between this year and last year, however, is management’s execution of its business plan despite them. That’s a huge plus going forward for PetroBakken’s growth and dividend.

Current production is 86 percent light oil and liquids, with very little actual revenue or netback now coming from gas. This makes the company essentially an oil play, though with some leverage when gas prices do eventually recover. These are the qualities I deemed last month made it superior to the stock it replaced, Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE). And I’m still convinced of that, despite Penn West’s slight outperformance last month.

PetroBakken also announced a CAD175 million boost in planned capital spending for 2012 to CAD875 million. Most of this involves additional spending in the Cardium, where the company expects 52,000 to 56,000 barrels of oil equivalent per day of output by the end of the year.

That will be funded by a very strong cash flow position, buoyed by 63 percent participation in the company’s dividend reinvestment plan. The company also issued eight-year debt at an 8.625 percent rate that, though high, will lock in capital and improve funding rates.

The company continues to make progress cutting debt, largely thanks to rising cash flow from the success of its development plan. The 55 percent increase in insider holdings the past six months is another strong vote of confidence. Buy PetroBakken up to USD18.

PHX Energy Services Corp (TSX: PHX, OTC: PHXHF) posted record revenue in the first quarter of 2012, paced by strong activity levels in Canada, the US and internationally, particularly Albania and Russia. Revenue rose 26 percent, earnings surged 104 percent and cash flow increased by 62 percent.

Cash flow as a percent of revenue rose to 19 percent from 15 percent a year ago. Gross profit as a percent of revenue rose to 29 percent from 27 percent a year ago. Funds from operations rose 35 percent to CAD0.53 per share. That drove the payout ratio down to 26 percent, even after the 50 percent dividend increase announced in late February.

Drilling conditions are expected to tighten for the rest of the year in many parts of North America. Management is offsetting that with aggressive expansion in international operations, which were 10 percent of profits during the quarter. The company announced another ramping up of capital spending to CAD55.1 million from an earlier projection of CAD38.9 million based on demand from existing customers. Operating days were up 10 percent globally.

In the US (34 percent of revenue), operating days were up 10 percent and day rates were up 15 percent. Oil drilling activity accounted for 55 percent of US activity measured in drilling days up from 31 percent last year, while Canadian liquids activity rose to 78 percent from 73 percent.

During its first quarter conference call, management stated it didn’t expect demand for oil equipment to come close to offsetting the continued reduction of natural gas activity. Nonetheless, it expects marketing activity and focusing on key niches to keep its expansion plan rolling.

That may be a tough nut this year, depending on what does happen with natural gas prices. And the task will be progressively more difficult if prices stay low under CAD2 per million British thermal units in Alberta for the rest of 2012. But with the stock under USD10 per share and yielding well over 7 percent, there are a lot of gloomy expectations priced in for a company that has weathered a very volatile environment to now. Buy PHX Energy Services up to USD14 if you haven’t yet.

RioCan REIT (TSX: REI-U, OTC: RIOCF) posted another solid quarter of growth, as its acquisition program continues to pay off.

Funds from operations rose 14 percent in the first quarter, 6 percent on a per-unit basis. That pushed the payout ratio down to 93.2 percent.

The company continued its pace of acquisitions, picking up five properties for CAD92 million in Canada and the US in the first quarter.

It also renewed 1.1 million square feet of properties in Canada at average rate increase of 10 percent, better than the 8.7 percent rate of a year ago.

Occupancy dipped slightly to 96.9 percent, primarily due to the closing of some Premier Fitness and Hart Store locations. Premier filed for bankruptcy last year, forcing RioCan to re-lease eight locations.

Since then, however, the REIT has reached deals with two national gym operators to lease seven of the vacated locations accounting for 96 percent of the space. The company expects minimal impact to revenue to rest of the year. Two of the Hart stores, meanwhile, have been re-rented at higher rates than before.

RioCan’s retention ratio in Canada is 91.2 percent of expiring leases, up from 87.1 percent a year ago. In the nascent US portfolio, these figures are an average 7.2 percent rent boost and an 83.1 percent retention ratio for expiring leases. That’s in a year CEO Edward Sonshine stated management “anticipated…would be a transitional and perhaps a difficult year for some of our tenants.” And it’s a strong testament to the company’s conservative strategy of adding business while simultaneously reducing risk.

Wal-Mart (NYSE: WMT) remains the company’s largest tenant at 4.5 percent of revenue. The company is also building a lucrative relationship with Target (NYSE: TGT). But no one customer accounts for more than 5 percent of revenue, while 85.7 percent of annualized revenue comes from “anchor tenants,” the most creditworthy of all tenants for retail mall owners.

Finally, the company remains one of the most conservative around when it comes to financing deals. A recent five-year, CAD150 million debt offering went off at a rate of just 3.8 percent. The REIT also issued 8.6 million units near its all-time high price, netting CAD230 million.

With CAD120 million in its acquisition pipeline, RioCan has many more opportunities to pursue its invest-to-grow strategy. And debt is just 46 percent of assets, actually down from 46.4 percent at the beginning of the year despite a frenetic pace of acquisitions.

My only problem with RioCan recently has been its unit price, which has consistently been over my target of USD25 per. I’m still not inclined to raise that target until the REIT raises its distribution again.

But RioCan is certainly a solid holding at current levels and a strong buy below USD25 for anyone who doesn’t already own it.