Hot Stock: PetroBakken Energy

Higher risk and higher yield.

On March 4, Dundee Securities initiated coverage on PetroBakken Energy (TSE/PBN), a Calgary-based oil exploration and production company, with a resounding buy. Analysts Brian Kristjansen and Clark Andrews think the stock, which has fallen 22% year-to-date, can climb back up 50% over the next 12 months, from $8.41 today to $13.

PetroBakken Energy, which Petrobank spun off in 2009, operates in Saskachewan, Alberta and B.C., recently said that its January 2013 production averaged 49,700 barrels of oil equivalent per day, up from the 37,000 BOE/d it produced when it first went into operation.

Dundee’s analysts like this company for several reasons. It owns land in four other spots, including in the natural gas-rich Horn River and Montney plays in B.C., and they expect its production per share to grow by 8.2% in 2013. Kristjansen and Andrews also say that the company has been a leader in technological innovation and it’s continuing to pioneer new ways to get oil and gas out of the ground.

While its future looks attractive, this stock price isn’t for conservative investors. It has an 11.2% yield—which might seem great for a retirement portfolio—but its payout ratio is a high 132%. However, with a low cost of production and growing free cash flow, Kristjansen and Andrews say that it should be able to get that down to 105% by 2015, about four percentage points below its peer group’s average.

The company is also highly levered. It’s current 3.2 times net debt to trailing cash flow is highest among its peers. Based on the analyst’s commodity price forecasts, though, they don’t think the debt is a huge issue. However, “this does carry a higher level of associated risk and intolerance to commodity price volatility,” they write.

This stock works best for someone looking to add a little kick to their portfolio. If this mid-cap name does what analysts think it will do, then it should hit that $13 mark or possibly go even higher. National Bank Financial thinks the stock could climb to $17.25, while others peg the stock price close to $14. It’s a riskier bet, but one that could have a big payoff.

For more investing insights, follow Bryan on Twitter @bborzyko