Alexander Klein takes a distinctly global view of Canadian oil and gas companies. And that perspective has been particularly rewarding in the past year.
Mr. Klein, senior oil and gas analyst with Dundee Securities Corp. in Calgary, placed first among 75 Canadian oil and gas analysts in StarMine Corp.'s rankings of 2010, based on the performance of his stock recommendations for the year - a split-personality year for energy commodities, as oil prices surged but natural gas stagnated.
The analyst credited his success for the year to his area of specialization - he tracks only a small cluster of junior and intermediate companies who, though based in Canada, focus their exploration and production outside of Canadian borders.
"Typically, Canadian-listed companies operating internationally are primarily focused on oil," he said, noting that the seven companies on his coverage list have little or no natural gas production. "If you were fortunate enough to be oil-weighted in 2010, you definitely had an advantage from a commodity perspective over those companies who were producing natural gas."
That advantage certainly played out in the outperformance of Mr. Klein's stock picks. Data compiled by StarMine - a stock market analytics service owned by Thomson Reuters - show that his recommendations generated excess returns of 47.1 per cent above the overall Canadian oil and gas sector in 2010, far and away the best performance of any analyst in the Canadian energy arena. (The next best, Frederick Kozak of Canaccord Genuity, posted excess returns of 29.4 per cent.)
"The international space tends to be much more risky, but the upside can be a lot bigger. That's the nature of what these companies are trying to do," Mr. Klein said. "If you're a junior company, you are drilling larger exploration targets than would be available to you in Canada. If you're successful, the upside can be large - and hence your stock returns can be quite a bit larger as well."
StarMine's industry excess returns formula uses each analyst's stock recommendations to form a "long-short" investing strategy - mimicking the effect of going long on stocks the analyst rates as "buy" and shorting the stocks he or she rates "sell". The analyst thus gets credit both for "buy"-rated stocks whose returns exceed the overall industry benchmark, and for "sell"-rated stocks whose returns underperform the benchmark. (Stocks rated "strong buy" or "strong sell" are awarded double credit; ratings of "hold" or "neutral" receive no score under the StarMine formula.)
Tim Gaumer, director of fundamental research at Thomson Reuters, pointed out that while the stocks Mr. Klein tracks may not be the household names of the Canadian energy sector, many are far from small-potato penny stocks that are prone to exaggerated percentage swings in value. One of his best performers of 2010, Pacific Rubiales Energy Corp., is a $30-plus stock with a market cap of $9-billion.
"It's not just a case of getting a pop from microcaps," he said.
He added that Mr. Klein has done a good job of knowing when to jump in and out of his stock picks. For example, Petrominerales Ltd. was up 70 per cent when Mr. Klein had a "strong buy" recommendation on the stock, but gained a modest 3 per cent after he downgraded it to "hold" in early December. (He returned to a "buy" recommendation in early January.)
One of the first things Mr. Klein looks for in picking stocks is a strong management team.
"I think management plays an important role in a successful company," he said. "We look for management to have international, in-country experience. " He also favours companies that are "well capitalized," and ones with a diversified portfolio of international exploration properties.
"If all they've got is one big well, and it doesn't work, you're left with a company with no cash and no prospects," he said. "Maybe the odd investor might want to take a flier on a company like that, but if you're looking longer term, that doesn't work."
And, naturally, political risk is always a concern when assessing companies operating in foreign countries.
"We're looking for relatively stable political regimes, countries with strong contract law, business-friendly governments," he said.
Mr. Klein's current top pick is Gran Tierra Energy Inc. , a Calgary-based company whose production is mainly in Colombia, but also has producing and exploratory properties in Argentina, Peru and Brazil. He said the firm has a strong balance sheet, a well-diversified portfolio of prospects, and a strong production base in Colombia's Costayaco field that should give it "two to three years" of steady production before those wells start to decline - buying Gran Tierra time and cash flow to expand its output elsewhere.
"We believe it has the most un-risked exploration upside potential," he said. "Even if you factor in risk, the exploration potential is still quite huge."