In my search to diversify my retirement portfolio, Zach at the Upside Surprise blog turned me on to Advantage Energy Income Fund (AAV: chart).

Advantage Energy is a Canadian oil and gas fund that pays a ~15% dividend through monthly distributions, making it a candidate for my Roth IRA.

After digging through the SEC filings, and listening to the latest conference call (accompanying presentation), I have only a few reservations about AAV, although those reservations may be short lived.

Advantage is undergoing a merger (recently approved by shareholders of both companies) with a company called Ketch.  The merger will provide year-round drilling opportunities that will take advantage of Ketch’s large undeveloped land base giving opportunity to low risk infill and step out drilling.

With the combination of the two companies, Advantage will be able to keep 2 or 3 drilling rigs active on a full time basis; a good thing with the current rig shortage in the patch.  The merger will also combine two strong management teams with backgrounds in operations/exploration (Ketch) and finance/acquisitions (Advantage).

My only reservation stems from their current (as of the May conference call) payout ratio of 95%.  According to Advantage CEO Kelly Drader, they’d like to have the payout ratio between 75-90%.  Board members were to reassess the dividend at the end of June to determine whether or not they need to adjust the payout ratio.

If they do adjust the dividend rate, I believe it will be short term while the two companies integrate operations and management teams.  Once complete, Advantage will have nearly 487,000 acres of undeveloped land that will stimulate reserves for years to come.

Further acquisitions are not out of the question for Advantage either, having performed 6 acquisitions in the last 4 years.  They will be poised as a small company looking to acquire 5,000 boe/day production in the future.

I like the prospects of Advantage Energy, however I’d like to see how they handle future dividends to reign in their payout ratio, of which news will be forthcoming shortly, before I put money into the market.

Again, I like the fund for my Roth IRA based on the fact that they are paying a healthy dividend, distributed monthly.  A Canadian tax may be a factor, but won’t lower the yeild appreciably.

Check out AAV, and let me know what you think.

Disclosure: I own no AAV at this time… 

Additional Resources
Advantage Energy Income Home Page
Historical Prices and Dividend Payouts
Merger Joint Information Circular
SEC Filings

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