Swanzy Quarshie, is portfolio manager at Sentry Investments. Her focus is oil and gas stocks.
Top picks:
Bonterra Energy (BNE-T)
Bonterra Energy is a dividend-paying oil and gas producer with a core position in the Cardium light oil play in West Central Alberta. Bonterra has taken advantage of the downturn, significantly enhancing the sustainability of its business model by focusing on cutting costs and improving efficiency. These actions have helped create a growing free cash flow model that will allow the company to sustain production, maintain its current dividend, as well as repair its balance sheet over time. The company's strong history of best-in-class returns of capital employed and a high-quality asset base provides investors the opportunity to optimize returns when oil prices recover.
Freehold Royalties (FRU-T)
Freehold Royalties is a dividend-paying oil and gas producer and royalty company with assets across Western Canada. Freehold's royalty model provides the company with above-average margins, which are passed on to shareholders in the form of dividends. Freehold has been able to benefit from the downturn in commodity prices by making a number of acquisitions, enhancing its portfolio of royalty assets. Additionally, the company stands to benefit from M&A activity on its own royalty lands, which have transferred property interests from weaker companies to more active and better capitalized drillers. Freehold has an attractive valuation relative to its royalty peers and offers shareholders exposure to rising industry drilling activity as oil and gas prices recover. With a very sustainable business model and a strong balance sheet, Freehold is in a solid position to increase future dividends.
Seven Generations Energy (VII-T)
Seven Generations is a high-growth oil and gas producer with a focus in the Montney fairway in Alberta. Since its IPO in October 2014, management has demonstrated strong execution through consistent outperformance of guidance and consensus expectations. The company's operational success and its recent acquisition of Paramount Energy's neighbouring lands has created a strong asset base that will support its growth profile for many years to come. Management has also been strategic in preparing for growth with firm contracts to ship gas to the Chicago market via the Alliance pipeline. Seven Generation's growing production, good balance sheet and proven management team provide investors an opportunity for meaningful upside in the energy space.
Past Picks: Sept. 2, 2015
Crescent Point Energy (CPG-T)
Then: $16.15 Now: $16.62 +2.91% Total return: +7.79%
PrairieSky Royalty (PSK-T)
Then: $25.29 Now: $26.24 +3.76% Total return: +8.33%
Bankers Petroleum (BNK-T)
Then: $2.05 Now: $2.18 +6.34% Total return: +6.34%
Market outlook:
We believe that the market is in the very late stages of what has been a challenging and lengthy rebalancing process. A combination of falling supply from non-OPEC producers, unexpected supply outages and growing demand from primarily non-OECD countries has created a strong fundamental backdrop that we believe will only improve in the coming quarters.
More importantly, a lack of capital investment in long lead time projects will create a gap in future supply that will require higher crude prices to fill. In the short term, however, uncertainty surrounding the macroeconomic picture, competing views from speculators, high levels of crude and refined product inventories and the direction of the U.S. dollar could create continued volatility around oil pricing. We are looking through the short-term noise and focusing on the improving fundamental backdrop.
Our outlook for natural gas has improved following the hot North American summer that helped alleviate surplus natural gas inventories. Although the structure of the continent's gas market is improving, weather continues to be the primary driving force. As such, we prefer crude oil to natural gas.