Pat McKeough responds to many requests from members of his Inner Circle for specific advice on specific stocks and other investments as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.

This week we received a question from an Inner Circle member about two Canadian junior energy stocks. Both companies produce and explore for oil and gas in western Canada with both having close to three-quarters of their daily output in oil. Both offer high dividend yields. Pat examines the production outlook for both companies and the potential risks and rewards of their ambitious acquisition strategies.

Q: Can you tell me what you think of Whitecap Resources and TORC Oil and Gas? Thanks.

A: Whitecap Resources (symbol WCP on Toronto; www.wcap.ca), produces and explores for oil and natural gas in Western Canada. Oil makes up 69% of its daily output; the remaining 31% is gas.

In the three months ended June 30, 2013, Whitecap’s average daily output jumped 32.1%, to 17,909 barrels of oil equivalent (including gas) from 13,559 barrels a year earlier.

Whitecap continues to grow by acquisition and successful exploration drilling. It just spent $173.6 million to add to its Valhalla and Garrington properties in Alberta. To pay for the purchase, it sold $170.0 million of shares. The move added 2,900 barrels per day of production.

The company pays monthly dividends of $0.05 per share, for a 5.3% yield. Whitecap just announced that it plans to raise its monthly dividend by 5.0%, to $0.0525 a share, starting with the October 2013 dividend. That gives it a 5.6% yield, based on the current share price.

Vero Energy merger leads to sharp increase in output for TORC

TORC Oil & Gas (symbol TOG on Toronto; www.torcoil.com), also produces and explores for oil and gas in Western Canada. Oil makes up 78% of its daily output; the remaining 22% is gas.

The company started up in December 2010 but grew quickly when it merged with Vero Energy in November 2012. That deal sharply increased TORC’s average daily output in the three months ended June 30, 2013, to 4,312 barrels of oil equivalent (including gas) from just 804 a year earlier.

TORC is now undertaking a major expansion through its recent $510-million purchase of oil-producing properties in southeastern Saskatchewan. These assets bring 5,700 barrels of oil per day of production, weighted 93% to oil, and considerable exploration potential.

To help pay for the purchase, the company is raising $241.6 million by selling 153.9 million shares at $1.57 each. It’s also selling shares to the Canada Pension Plan Investment Board to raise an additional $170 million.

The company now plans to begin paying an annual dividend of $0.10, payable monthly, starting in September 2013. That rate will give it a 6.1% yield, based on its current share price.

In the Inner Circle Q&A, Pat examines the cash flow outlook for each of these junior energy stocks and looks at whether the companies will be able to sustain and grow their high dividends. He concludes with his clear buy-hold-sell advice on these two stocks.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

With natural gas prices remaining low, do you look for junior energy stocks that are more focused on oil production? Do you like it when junior oil and gas stocks pay a dividend, or would you prefer that the companies put their cash flow back into exploration and development?