Canadian small-cap oil and gas stocks are poised to outperform U.S. peers as their moves to cut costs and lower debt begin to gain traction with analysts and investors.
Analysts have increased their price targets for Canadian producers with market valuations of up to $2-billion more than equivalent U.S. peers. Canadian companies are expected to gain 21 per cent over the next 12 months, compared with 13 per cent for U.S. competitors, according to data compiled by Bloomberg.
That valuation gap has made Canadian companies including Bonterra Energy Corp., Torc Oil & Gas Ltd. and Vermilion Energy Inc. attractive buys relative to U.S. peers, said Swanzy Quarshie, a money manager at Sentry Investments in Toronto.
"There's a lot more value in Canada because Canadian businesses' capital requirements have gone down significantly," said Ms. Quarshie, who helps oversee $18-billion in assets. "The stocks are really well priced."
The higher price targets suggest the Canadian energy stocks may reverse six months of lagging returns. U.S. stocks have gained 34 per cent more than their Canadian peers in the six months to Aug. 31, according to the data, which analyzed 59 Canadian companies.
Two years into a commodity-price downturn, executives in Canada's oil and gas hub have sold assets, raised equity and looked for ways to scale back costs. Investment since the slump began in 2014 has been slashed the most since 1947, according to the Canadian Association of Petroleum Producers.
Canadian companies remember the importance of controlling debt and keeping costs low from the collapse of petroleum prices after 2008 and the recession that followed, said Robert Mark, director of research at MacDougall, MacDougall, McTier in Toronto, which oversees $6-billion in assets.
"There's definitely better upside on the Canadian side," he said "The Canadian guys learned their lesson post-2008."
Investors gave a boost to U.S. shale producers over the past two quarters as crude almost doubled from a 12-year low in February to almost $50 a barrel in June. That encouraged some companies including Oklahoma City-based Continental Resources Inc. to return crews to finish wells left uncompleted when prices began to tumble two years ago.
Continental's shares have more than doubled over the past six months, while Oasis Petroleum Inc. of Houston has gained 69 per cent. Canadian share gains have been modest in comparison.
Vermilion has risen 26 per cent over the past six months. The company, while posting a loss in the second quarter, has targeted as much as $50-million in cost reductions and has lowered per unit expenses by 18 percent. Vermilion has exposure to global prices and "flexibility to allocate capital," said Kyle Preston, a company spokesman. The producer expects a "modest" increase in spending next year, he added.
Torc Oil & Gas Ltd. has gained 21 per cent over the same period. The Calgary-based producer arranged financing worth $75-million as part of a bought deal, has a bank facility of $400-million and has hedged as much of 60 per cent of its production against commodity price fluctuation. Chief Financial Officer Jason Zabinsky wasn't available to comment.
"The Canadian oil and gas space continues to look more attractive than the U.S. space on most 2017 metrics," Chris Feltin, an analyst at Macquarie in Calgary, wrote in a note. "Many companies have taken dramatic steps over the last year to address their leverage issues, including asset sales, more focused capex programs, and opportunistic hedging."
Birchcliff, which has gained 74 per cent in the past six months, is the "most attractive name" in North America, Feltin said. The company in July purchased assets from Encana Corp. in Alberta's Gordondale region, giving a boost to the stock whose largest shareholder is resource investor Seymour Schulich.
Smaller oil producers are generally more responsive to fluctuations in commodity prices than larger companies such as Suncor Energy Inc. and their prices have more potential to rise along with petroleum, analysts said.
Still, there may yet be trouble ahead for Canadian petroleum companies. The rebound in U.S. crude prices from a low of about $26 a barrel this year hasn't pushed oil high enough for most companies to start investing in new production.
Oil has recovered almost 70 per cent from the February doldrums, and recently fell below $45. Most companies say they need prices to rise to between $50 and $60 before new investment can be considered.
In addition, investors have raised concerns about a sinking Canadian dollar, pipeline access and increased regulation. Those have helped keep stock gains in check.
For now, if oil continues its slow climb back to more than $50 by the first quarter of 2017, as forecast by analysts surveyed by Bloomberg, Canadian producers' parsimony and careful approach will pay off.
"There's more impetus for Canadian companies to be prudent," said Ms. Quarshie. "They're at the back of the line in getting product to market."