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Baytex Energy (NYSE:BTE) is providing shareholders rock solid dividend returns. The company is outperforming its peers. The company has provided standout monthly dividend and capital appreciation returns. Investors must recognize dividends mean very little if they are experiencing capital losses on their investments. Quality stocks pay solid dividends and tend to have rising share prices. Per the below chart, investors can note Baytex is the only one with a positive total annualized rate of return over the past two years. In this article I'll focus upon the rationale to buy Baytex and four other energy plays to avoid.

Baytex Background
Baytex Energy Corporation is a Canadian energy company based in Calgary. Since its founding in 1993, Baytex Energy has been involved primarily in the acquisition, exploration, development and production of oil and natural gas in Canada. Baytex has recently emerged in the United States.

U.S. Oil Property Development
During 2007 and 2008, Baytex made land position acquisitions in the Powder River and Williston Basins in the United States. Baytex believes that the projects have the potential to reach around 300 wells that will produce 420 barrels of oil per well.

Baytex oil production has steadily been increasing during the past years. Production dropped a small amount during 2005 when compared with 2004 production. However, production rebounded in 2006 and has continually increased every year since then. Baytex produced 35,000 barrels per day of heavy oil, and 7,000 barrels per day of light oil in 2011. The company expects production to increase to 37,600 barrels per day of heavy oil and 8,700 barrels per day of light oil during 2012.

Baytex Management
Leading Baytex is its Executive Chairman, Raymond T. Chan. After joining Baytex in 1998, Raymond Chan has been a big factor in the company's success, by holding various higher management positions. On January 1, 2009, Mr. Chan was named Executive Chairman. Under his leadership and the highly skilled leadership team, the company has seen growth over the past years. Baytex is expected to continually grow in 2012.

Baytex Oil Focus
Most of the company's operations (pdf) are in the Western Canadian Sedimentary Basin. The majority of Baytex operations are in Canadian heavy oil. This accounts for 70% of the company's production and over 73% of its oil reserves. Baytex's Canadian heavy oil production is at west central Saskatchewan, Cold Lake/Ardmore, and Peace River in Alberta, Canada.

Baytex production of heavy oil during the third quarter of 2011 reached 37,280 barrels per day. This was an increase of 29% over the same quarter of 2010. The company also drilled 26 oil wells and two service wells with a 100% success rate at the heavy oil properties.

Canadian light oil and gas is the next profit earner for Baytex Energy. The company has light oil and gas properties at various British Columbia and Alberta fields.

Competitor Natural Gas Price Risk
Because Baytex focuses upon oil and not natural gas production, the company has been spared the downward spiral of natural gas producers. Today, natural gas dropped 5% to close at $2.38 per 1,000 cubic feet. Exxon Mobil (NYSE:XOM) announced it would not decrease natural gas production as other producers have announced in recent weeks. Natural gas prices are trading at 10-year record lows. This is not a time to catch a falling knife.

My Personal Recommendation
Natural gas stocks are going down. Either sell your natural gas stocks or hedge your natural gas stocks. Hedging can include a pair trade with a long position and a short position. It's easier to purchase a protective put on a stock to limit your losses. I have lost money in the past by trying to rationalize why the stocks were going down. At the end of the day, I learned "discipline always trumps conviction."

Avoid San Juan Basin Royalty Trust (NYSE:SJT)
I have owned San Juan Trust for more than 15 years. Natural gas rates are at the lowest point in 10-13 years. Technology is simply accelerating excess capacity to come on line. Those who have owned San Juan Trust know the tax reporting is difficult for long-term holders. Nevertheless, sell this name if you believe natural gas will remain low. San Juan Trust is well known for its natural gas production in north western New Mexico.

If you want to hedge with a protective put, I would recommend a SJT Jul 2012 17.500 put (SJT120721P00017500). For $80, your maximum downside is to the strike price of $17.50 through July 20th, 2012.

Avoid Enerplus Corporation Common (NYSE:ERF)
Enerplus is an energy producer of oil and natural gas in Canada and the United States. The company simply has a heavy debt burden and a natural gas presence that will take its toll if natural gas hedges roll off and lower natural gas hedges are put on.

The dividend history shows an income investor a lack of income growth. On January 17, Enerplus had to offer a share offering at $23.45 to raise $300 million. If oil is at $97, the company should be deriving plenty of cash flow from the oil sales. The share issuance was done for the purpose of 2012 capital expenditures. The dividend is not growing. The company has inadequate cash for 2012 capital expenditures. These are not traits I want to see (pdf) from a dividend stock.

Avoid Penn West Petroleum (NYSE:PWE)
Penn West is one of the largest conventional oil and natural gas producers in Canada. Penn West operates assets in light oil in Canada. Based in Calgary, Alberta, Penn West operates throughout western Canada on a land base covering over six million acres (pdf).

I recommend investors seeking a growing income to avoid Penn West. The company does have 60% of 2012 oil production hedged above $85, but the stock lacks price support. This yield is less than compelling at 4.9%. I have to avoid this name.

Avoid Pengrowth Energy Corporation (NYSE:PGH)
I recommend avoiding this equity. Pengrowth Energy engages in the acquisition, exploration, development, and production of oil and natural gas reserves in the Western Canadian Sedimentary Basin. I recommend selling this stock due to the decreasing monthly dividends. In my portfolios, I want rising dividends and especially at a time when oil is at $100 per barrel.

Pengrowth's dividend was 6.9 cents per share in January 2012. In December 2008, the monthly dividend was 13.9 cents per share. In years 2006 through 2008, the monthly dividend was 22 cents per share. Clearly this is a name that does not fit into a growing income portfolio.

Batyex 3rd Quarter Financial Highlights
During the third quarter of 2011, Baytex drilled 4 multi lateral wells in eastern Alberta. The company was producing light oil, natural gas liquids and natural gas at an average of 15,345 barrels of oil equivalent per day. This was an increase of 9% for light oil and natural gas liquids, but a decrease of 12% for natural gas, compared with the same period in 2010.

Baytex Monthly Dividends
Baytex has steadily provided monthly dividends to its investors during the past years. The company recently approved a dividend of $0.22 per share. Its dividend yield is currently at 4.7%. Baytex is focused on providing its investors with increasing dividends and in growing the production base. The company plans to continually increase production in 2012 by drilling more wells at the properties. The company foresees a production growth rate of 8% per annum.

Summary
I believe investors should buy Baytex. I cannot predict the bottom or the perfect entry price. The company is oil focused and oil is trading at $100 per barrel. I would try to obtain shares in the $52 to $53 share range. This is a growth and income story that is producing 25% total annualized returns. I advise investors to sell natural gas stocks and put proceeds into winning positions. New technology is here and can extract natural gas that previously was unobtainable. Supply versus demand means lower natural gas prices. In the meantime, Baytex proves oil is priced high and rewarding shareholders with this distinction.

Source: 1 Dividend Stock To Buy And 4 To Avoid