Parkland Income Fund (TSX: PKI-U, OTC: PKIUF) announced generally solid third-quarter results, despite a 15 percent decline in cash flow. More noteworthy, however, was what was missing from the report: a definitive post-conversion dividend policy.

That will come in a separate release on Nov. 30. In the meantime, management’s only statement remains that the new dividend will be between 75 and 110 percent of the trust’s current annualized distribution rate of CAD1.26 per unit.

In a worst-case, that means a yield for Parkland upward of 8 percent based on the current price. In a best-case, the yield would be nearly 12 percent. My view, based on third-quarter results, is the final dividend will probably wind up somewhere in the middle, though closer to the lower end of the range.

Headline distributable cash per share produced a third-quarter payout ratio of 150 percent and a 104 percent year-to-date tally. That was in part due to weaker refining margins. But it was also a product of Parkland’s new business mix following the acquisition and absorption of Bluewave Energy, which has shifted the seasonality of revenue to the fourth quarter.

Third-quarter fuel sales volumes were 27 percent ahead of year-ago levels on the acquisitions. That’s before the closing of the company’s agreement with Shell Oil on Sept. 30, which has increased Parkland’s direct sales of lubricants by 92 percent, adding Shell, Pennzoil and Quaker State products. The Shell Oil deal is immediately accretive to cash flows and strengthens the company’s position as Canada’s leading fuel marketer.

Third-quarter costs, however, shifted even more. Operating and direct costs rose 52 percent, while marketing, general and administrative expenses surged 56 percent from year-earlier levels. That’s the result of greater infrastructure acquired with Bluewave, which will begin producing greater revenue in coming quarters. And the lower margins pinched cash flow.

Looking ahead, Parkland figures to be a much more profitable company, and with room to grow as more major refining companies farm out the distribution part of their business in more remote regions. The payout ratio should begin to improve in the fourth quarter, thanks to the greater revenue from the Shell Oil deal as well as a shift in the cost-revenue balance in the fourth quarter of the year.

Management’s stated goal is to pay out based on annualized distributable cash flow, which takes the seasonality of fuel distribution and marketing into account. The Fuel Marketing portion of the business is likely to remain the most important segment, which depends heavily on volumes. Margins are also affected by local competition in areas served, as well as refiners’ margins.

The more the company is able to expand its reach and volumes, the less vulnerable it should be to factors beyond its control such as refining margins and regional competition. One of the bright spots of third-quarter numbers was an upward revision on synergies from the Bluewave deal. And management’s Enterprise Resource Planning System has improved efficiencies and cut costs elsewhere in the organization.

To be sure, we’ve yet to see Parkland put it all together, a task made more difficult by continued economic weakness. That may induce management to take a more conservative line when it sets the first post-conversion dividend for the company in two weeks.

Even if the dividend is set low, however, Parkland will still boast a high yield and robust business plan, making it a solid bet for annualized total returns of 15 to 20 percent, particularly after Monday’s selloff. Buy Parkland Income Fund up to USD14 if you haven’t already.