Mason Granger is portfolio manager at Sentry Investments. His focus is Canadian energy stocks.
Spartan Oil (SPE-TSX)
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.
PrairieSky Royalty (PSK-TSX)
PrairieSky is currently the largest oil and gas royalty company in North America, with ~5.3 million acres of petroleum & natural gas mineral title lands and ~3.6 million acres of gross overriding royalty lands. We believe that PrairieSky has the most sustainable dividend structure of its peers over the near to medium term, with a very low risk of a cut through 2016 even if current commodity prices persist. PrairieSky has a relatively low decline rate, a solid balance sheet, and high netbacks, which are hallmarks of a sustainable yield. We also believe that many acquisition opportunities are likely to develop for PrairieSky over the year as conventional oil & gas companies look to bolster their balance sheets with royalty interest divestitures. PrairieSky's superior cost of capital should give it the ability to capitalize on such opportunities, and improve the company's dividend sustainability even beyond 2016.
Parex Resources (PXT-TSX)
Parex remains the best-in-class international exploration & production company focused on developing oil in Colombia's Llanos Basin. The company has grown from a single discovery at it Kona field to a production level of 26,500 barrels per day of oil from more than 8 blocks. Drilling success has been exceptional. Optimizing production from a diverse portfolio has enabled Parex to extend the reserve life to over 7 years. The company plans to drill up to 8 exploration wells in 2015 and total capex is expected to be funded with cash flow based on a $50 to $55 (U.S.) per barrel Brent crude oil price. The balance sheet is strong with minimal debt.
Past Picks: April 24, 2014
Bankers Petroleum (BNK-TSX)
Then: $5.94; Now: $2.84 -52.19%; Total return: -52.19%
Bellatrix Exploration (BXE-TSX)
Then: $10.47; Now: $3.05 -70.87%; Total return: -70.87%
Bonterra Energy (BNE-TSX)
Then: $56.91; Now: $33.88 -40.47%; Total return: -36.76%
Total return average: -53.27%
At present, crude oil prices are at or very close to a bottom following the collapse that began in mid-2014. OPEC, and specifically Saudi Arabia, made a decision last November to maintain production levels and leave the market forces of supply and demand to find a price level that balances the market. Global supply growth continues to outpace demand, but this is poised to change in the second half of 2015. We anticipate that with the end of a seasonal period of lower demand for refinery maintenance that occurs in March/April, we should see the beginning of a tightening of global oil balances in the second half. The normal period of Q3 global demand is typically significantly higher and these increases will be coming at a time when a very rapid reduction in U.S. oil directed drilling activity in the U.S. should be starting to meaningfully impact production. As always, the geopolitics of the Middle East and other volatile regions is the wild card in terms of the oil price direction. OPEC meets again in June and all producers in the cartel are feeling the pain of lower oil revenues. On the natural gas side, growth in U.S. production has been sufficient not just to satisfy higher winter demand this year but replenish depleted storage levels and erase the storage deficit that resulted from last year's unusually harsh winter in North America. Significant gas growth in the U.S. north east from prolific and highly economic gas plays like the Marcellus also has the potential to aggressively compete for traditional Canadian end markets. For this reason, we are cautious on the outlook for natural gas prices, and in particular, the price received by Canadian producers. However, we remain bullish on the prospects for North American natural gas in the long 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.