Mason Granger is portfolio manager at Sentry Investments. His focus is on Canadian energy stocks.
Whitecap Resources (WCP TSX)
Cost base of $10.35/share
Last purchase on November 4, 2014 at $13.67/share
Whitecap Resources is an oil-weighted E&P with four main core areas in northwest Alberta, central Alberta, and southern Saskatchewan targeting oil. We believe that Whitecap is a blueprint for the successful transition to the dividend-paying intermediate model, owing to the company's sound operational execution, well-focused acquisitions in quality resource plays, and the associated management of its decline rates. We believe the company is among the best positioned dividend companies to persevere through the softer crude pricing environment without cutting its dividend or sacrificing its balance sheet. The company has hedges covering over 60 per cent of its production net of royalties for the first half of 2015 at prices almost $100/bbl which should support both the dividend and capital program into next year.
DeeThree Exploration (DTX TSX)
Cost base of $7.88/share
Last purchase on November 11, 2014 at $5.74/share
DeeThree Exploration is a growth-oriented junior light oil producer primarily focused on the Brazeau Belly River and Alberta Bakken plays in Western Canada. The company assembled a unique asset base that provides investors with exposure to an attractive organic growth proposition. DeeThree has an attractive balance sheet, a history of organic growth on a per share level and a valuation that is below its peer group. With continued strength and repeatability of well results, we believe the market will become increasingly comfortable with the long-term development potential of the plays and this will be reflected in both the generation of per share value creation and a narrowing of the valuation discount.
Spartan Energy (SPE TSX / SPE.TO)
Cost base of $2.92/share
Last purchase on September 5, 2014 at $3.89/share
Spartan Oil is the third iteration of 'Spartan' by a management team that has established themselves as highly disciplined and proven value creators in Calgary. The company is a light oil-focused producer primarily in Saskatchewan with a strategy hinged on sustainable growth through a combination of accretive acquisitions and organic additions via the drill-bit. Looking to 2015, we continue to believe that the asset base has the potential to deliver meaningful free cash flow based on low declines, attractive capital efficiencies, and high light oil netbacks. The company is approaching a size, asset base, and valuation that could make for an accretive addition to a larger dividend paying corporation.
Past Picks: February 20, 2014
Spartan Energy (SPE TSX) *Previously Alexander Energy (ALX TSX-V)
*Reverse Stock Split* February 28, 2014 - 1 for 4
Then: $0.65; Now: $3.00 +15.38%; Total return: +15.38%
Canyon Services Group (FRC TSX)
Then: $11.38; Now: $10.92 -4.04%; Total return: -0.99%
TORC Oil & Gas (TOG TSX)
Then: $10.65; Now: $10.72 +0.66%; Total return: +3.89%
Total return average: +6.09%
Although we had anticipated a correction after the strength in energy stocks in the first half of 2014, the current decline in oil prices has been much larger than we expected and, in our opinion, is much larger than can be justified by fundamentals. There seemed to be increasing worry about macroeconomic risks, namely that China, the growth engine of crude demand, is perceived to be slowing, Europe is stumbling back into recession and that a rising U.S. dollar is a headwind for commodities. In addition, negative sentiments have been amplified by suggestions that the market is heading for oversupply amid an unsubstantiated assertion that the Saudi Arabians are now engaged in a price war for market share. At the end of the day, it seems that the key driver for the precipitous decline in crude oil pricing has been a massive unwinding of net speculative futures positions in crude oil, the magnitude of which we have not seen in years. As such, we feel that the price decline has been driven more by financial markets instead of physical markets. We continue to be constructive on a recovery in oil prices out of a view that current prices are well below what many key producers within OPEC need to meet fiscal spending objectives and that a significant portion of world oil supply is subject to disruption because of geopolitics, particularly against a backdrop of relatively narrow spare capacity. We also remain bullish on the prospects for North American natural gas in the medium term, as the continent edges towards being a significant exporter of liquefied natural gas (LNG) in the coming years and demand for natural gas continues to rise.