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Number Cruncher

Small cap energy stocks fuel this fund's rise Add to ...

WHAT ARE WE LOOKING FOR?

This is our third look this week at what the pros are buying.

Each quarter, we check out the top holdings of several investment funds. It's a good way to gain more insight into a fund, or get stock tips to begin further research. You can find the securities on the fund company's website. Today, we examine Ark Aston Hill Energy Class at www.arkfunds.ca.

ABOUT THE FUND

The $15-million natural resources equity fund is managed for Ark Fund Management Ltd. by Joanne Hruska, vice-president of Aston Hill Financial Ltd. Launched in January, 2008, the fund posted a 74.1-per-cent return in 2009.

The fund is focused on undervalued energy companies backed by strong management. The mandate is to have at least 50 per cent in junior oil and gas companies. It is currently slightly overweight - closer to 60 per cent - on the natural gas side.

"The small- and mid-cap names are still quite inexpensive" after being unduly punished in the 2008-2009 stock market meltdown amid the credit crunch, Ms. Hruska said.

The manager is "cautiously optimistic" about natural gas prices this year despite some concern about oversupply. She expects the commodity to trade at about $6 (U.S.) to $7 per 1,000 cubic feet on the New York Mercantile Exchange. She is "neutral" on the price of oil, which she expects will fluctuate in the $70-to $85-per-barrel range this year, and trade on prospects for a global economic recovery.

WHAT DID WE FIND?

Names that many investors may not have heard of.

"The reason you own juniors is because they are often takeover targets," says Ms. Hruska.

The stock of ProspEx Resources Ltd., which got creamed late last year after the Caisse de dépôt et placement du Québec sold its 12-per-cent stake, now trades at 3.5 times cash flow, she said.

"The average range that we have seen over the years is about 5 to 7 times [cash flow]for small-to-mid cap energy names." Her one-year target is $2.75 a share.

"ProspEx has potential for multi-year drilling from their inventory of plays that can increase their production over time," she added.

Orleans Energy Ltd., another junior oil and gas firm, is similar to ProspEx in having "good management, good valuation, not too much debt and good growth potential," she said. Her one-year target for Orleans Energy, which trades at 4 times cash flow, is $3.60 a share.

Vero Energy Inc., which has potential from its Edson property, has seen its stock move up partly on takeover speculation, she said. "It was $4 a share not long ago, and it has moved up … But it is still not expensive now."

Her one-year target for Vero Energy, which trades at 3.5 times cash flow, is $9.50 a share. "Vero had a little bit higher debt levels last year, but we think they are dealing with it so that is positive," she added.

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