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Workers tap deep into North Dakotas Bakken formation, on a Precision Drilling rig.Nathan VanderKlippe/The Globe and Mail

Monday was another day of falling oil prices and energy stocks. Yet the great slide in oil prices has also created an irresistible opportunity, says Hanif Mamdani, lead manager of the $3.6-billion PH&N High Yield Bond fund with RBC Global Asset Management: Energy bonds are on sale for bargain prices.

Specifically, Mr. Mamdani, one of Canada's shrewdest fixed income investors, has been drawn lately to the senior debt of high quality, Canadian oil patch firms he believes have the balance sheet, management intelligence and experience to ride out the effects of the ongoing oil supply glut. He won't disclose what or how much he's bought but says it's "material."

"It's turning into a fairly compelling opportunity," Mr. Mamdani says.

Mr. Mamdani has successfully run against the herd in the past: he correctly bet the market's concerns about Telus Corp's credit rating downgrade were overblown 12 years ago, and again more recently that Yellow Media Ltd. debt was so marked down in advance of its financial restructuring that incoming bondholders would be rewarded once the balance sheet was redrawn.

Here's how he sees the play in the oil patch: spreads on senior bonds for firms such as Precision Drilling Corp., Baytex Energy Corp., Western Energy Services Corp. and Trilogy Energy Corp., have jumped by between 300 and 500 basis points since July, giving them annualized yields of nine per cent to 11 per cent. In many cases, the bonds come due in four to five years.

"These are solid companies that have very reasonable balance sheets," he says. "Many of them generate free cash flow even at [current] crude oil prices. They're run by extremely competent managements that have been through many cycles and have vast amounts of their own wealth invested."

In some cases, low oil prices don't have a uniformly negative impact. Take Precision: it has slashed capital spending plans, but while it isn't spending money to build new rigs, it will continue to collect cash for rigs already in service. That can be used to retire debt or support its dividend. "At some point people will realize Precision bonds are yielding 10 per cent for a company with low leverage," he said.

In other words, a compelling opportunity: all investors have to do is buy the bonds and hold them to maturity, and they will earn nine per cent or more so long as the companies don't default. Should oil prices rise, risk premiums fall and the bonds appreciate in value, those returns could rise to as high as 20 per cent, Mr. Mamdani figures.

And how likely is a rebound in oil prices in the next four years? Consider the precedent, says Mr. Mamdani: Low prices should crimp supply and stimulate demand, while economic growth sops up the surplus. The price of oil may not have bottomed, "but to assume [the very bottom] will be the time to buy energy stocks and high-yield bonds is naive," he says.

By then it will be too late.

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