2 Alternative Energy Income Streams

06/26/2012 9:45 am EST

Focus: GLOBAL

These two Canadian energy stocks are in a prime position to capture new demand in coming quarters while kicking off nice dividends, writes David West of The Money Reporter.

Integrated oil and gas company Imperial Oil Limited (Toronto: IMO) it is a leading refiner and marketer of petroleum products and a major producer of petrochemical products. Majority-owned by ExxonMobil (XOM), which has a 69.6% stale, Imperial has an increasing focus on projects in the oil sands.

Imperial is important to us for a couple of reasons. First of all, it holds down the only resource allocation among our list of recommended common shares (though there are many more resource-oriented plays in our list of income stocks and trusts).

Second, it pays a dividend that is important to its total return, since its share price has not been doing all that well in the past handful of years. The company has paid dividends every year for over a century, and has increased its annual dividend payment for 17 consecutive years. The most recent increase was for the first quarter of 2012, to 12 cents per quarter from 11 cents in the fourth quarter.

Dividends are important considering that, although Imperial posted a price gain of 16.5% in calendar 2011, that has to be compared with -3.7% in 2010 and -6.2% in 2009. Said another way, Imperial finished 2008 at $41.73 per share, and today it’s at $42.46.

Of course, we do our own fundamental analysis here at The Money Reporter. But at times we like to lift our heads out of our spreadsheets and our other input factors to see what others are saying about our companies.

One of the sources that we respect highly in this regard is DBRS, the new moniker of the former Dominion Bond Rating Service. DBRS does not make buy, sell or hold recommendations on the companies it analyzes. Instead, it assesses the creditworthiness of major companies and governments. If you’re thinking of buying a bond of one of these entities, DBRS can tell you what some of the risks are in doing so.

DBRS just did its assessment of Imperial Oil, a company that we’ve had as a buy recommendation for a very long time. In the end, the agency rated IMO long-term debt AA (high) with a stable trend. But their method includes a rundown of the four main strengths and the four main challenges faced by the company, and we find these interesting.

The first strength DBRS cites about IMO is its strong ownership and sponsorship. We’ve already mentioned the ExxonMobil majority ownership. But DBRS says that "in addition, ExxonMobil provides management and technical expertise and a potential downstream solution for Kearl and for the growing heavy oil volumes from Cold Lake through its extensive refinery operations in the Gulf Coast."

A second strength cited by the agency is the company’s strong integrated market position. It also cites high medium-term growth prospects and superior financial and liquidity profiles.

In terms of challenges, the main one listed is balance sheet pressures from mega projects. Rising cost inflation pressure is a second challenge. Also taken into consideration is that its production and reserve mix is heavily weighted towards oil, and a volatile crude price environment. As with doctors, sometimes it’s good to get a second opinion. We maintain IMO as a buy.

DBRS also recently looked into Brookfield Renewable Energy Partners (Toronto: BEP.UN), rating its senior unsecured debentures and notes BBB (high). In doing so, it assessed the strengths and challenges of BEP as it did for Imperial Oil. In terms of strengths, four were cited.

First was BEP’s high-quality renewable power generation with low operating costs: production from renewable facilities, with no fuel or related emission control or other environmental treatment costs, has low marginal production costs. Second was its diversified asset portfolio; approximately 32% of the total expected hydroelectric generation is in Canada, 45% in the United States, and the remaining 23% in Brazil.

The third strength was its cash flow stability from long-term contracts. No. 4 was the company’s risk allocation through non-recourse project debt.

Among the challenges listed by DBRS, the main issue is a perennial one faced by the company since way back when it was Great Lakes Power Income Fund: it has volume risk due to hydrology fluctuations. If the water doesn’t flow, hydroelectric power doesn’t get generated; it’s as simple as that.

BEP.UN remains a buy.

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