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Investors seeking to bet on rising oil prices can take comfort in growing tailwinds for roller-coaster energy stocks.

Crude oil has rallied amid concerns about supply disruptions, inadequate spending on energy projects and rising demand from global economic growth. West Texas Intermediate [WTI], the benchmark for U.S. oil, rose to nearly US$75 per barrel earlier this month before retreating to just shy of US$68 on Wednesday.

It’s a far cry from oil’s plunge to just under US$30 per barrel more than two years ago from more than US$100 in mid-2014.

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The U.S. decision to withdraw from a nuclear deal with Iran and press its allies to end oil imports from there by Nov. 4 would reduce a major supply source. The shortfall could outstrip a recent pledge by the Organization of Petroleum Exporting Countries and Russia to raise production. Venezuelan oil output, meanwhile, has collapsed amid an economic crisis. While rising supply from U.S. shale oil is a risk to the bull case for crude, a pipeline shortage is still a problem.

Given current market conditions, we asked three energy fund managers, including one who expects US$100-a-barrel crude next year, to give their top oil-stock picks.

Rafi Tahmazian, portfolio manager, Canoe Financial LP, Calgary

Funds: Canoe Energy; Canoe Energy Income

The pick: Parex Resources Inc. (PXT-TSX)

52-week range: $12.19 to $26.78 a share

Oil producer Parex Resources is an attractive play on rising crude prices, but there are other potential catalysts for its stock, Mr. Tahmazian says. Because Calgary-based Parex is focused on exploration and production in Colombia, its oil is based on the international Brent pricing for crude which trades at a premium to WTI.

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Parex, which produces 43,000 barrels a day and has no debt, needs “US$90-million a year to sustain production, and their cash flow is US$375-to-$400-million a year,” he notes. With excess cash, it will need to acquire or sell something so “there is going to be an opportunity for value,” he adds.

Its management previously built up Petro Andina Resources Inc., an oil producer in Argentina, before it was sold in 2009, and transitioned its Colombian exploration assets into Parex. Investing in Colombia is less risky now given the recent election of a business-friendly government and a peace deal with the left-wing FARC guerrilla group, he says.

The pick: Paramount Resources Ltd. (POU-TSX)

52-week range: $13.80 to $25.57 a share

Paramount Resources is a natural gas and liquids company whose condensate production makes it an appealing play, Mr. Tahmazian says. Condensate is a light form of oil which is a byproduct of natural gas. Much of the Calgary-based firm’s cash flow stems from condensate which gets a premium above WTI crude, he notes. Alberta oil sands producers need condensate to thin out bitumen to move it through pipelines so there is a market in province.

After selling assets to Seven Generations Energy Ltd., Paramount bought Apache Canada Ltd., and merged with Trilogy Energy Corp. Now, Paramount, which is controlled by entrepreneur Clayton Riddell, has key land in the liquids-rich Duvernay and Montney plays.

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Paramount, which has a clean balance sheet, produces 90,000 barrels of oil equivalent a day. “Roughly 40 per cent of it is [natural gas] liquids and most is condensate,” he says. “Its stock trades around four times 2019 cash flow.”

Robert Lauzon, portfolio manager, Middlefield Capital Corp., Toronto

Fund: Middlefield Global Energy

The pick: Whitecap Resources Inc. (WCP-TSX)

52-week range: $7.40 to $10.36 a share

Shares of Calgary-based Whitecap are compelling because the oil producer pays a growing dividend, while its shares “are undervalued,” Mr. Lauzon says. “I think [oil] is probably going to be range-bound between US$65 to $75 per barrel for a while. Exogenous shocks could spike oil to US$80 or above, but I can’t forecast that.”

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Whitecap, which is focused on Alberta and Saskatchewan, has a clean balance sheet, he says. It began increasing its monthly dividend late last year after cutting it twice in 2016, and “we expect a small dividend bump next year,” he adds.

Its chief executive officer, Grant Fagerheim, has a history of starting and selling energy juniors, but Whitecap differs in that it is not the prey but rather a predator acquiring oil assets, he says. Whitecap “trades at about 5.6 times debt-adjusted cash flow for 2019, but we think a quality company like this should trade at seven times,” he suggests. “I could see this stock in the $12-to-$14 range in a year.”

The pick: Freehold Royalties Ltd. (FRU-TSX)

52-week-range: $11.71 to $16.41 a share

Freehold Royalties is “one of the lower-risk ways of playing energy in Canada” because it doesn’t have operating costs associated with production, Mr. Lauzon says. The Calgary-based firm focuses on acquiring and managing oil and gas royalties. Royalty revenue, which is partly tied to commodity prices, would also increase if oil prices rise, he adds.

Freehold, which should have zero debt next year, is expected to raise its monthly dividend again in 2019, he says. It began raising its payout last year after cutting it in 2015 and 2016. However, it has paid $31 a share in dividends since going public in 1996, he notes.

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Freehold stock, he says, is undervalued compared with royalty peers, such as PraireSky Royalty Ltd., Franco-Nevada Corp. and Wheaton Precious Metals Corp. Freehold could be a takeover target, but the acquirer would need to get the nod from Canadian National Railway’s pension fund which owns a 22-per-cent stake, he says.

Eric Nuttall, portfolio manager, Ninepoint Partners LP, Toronto

Fund: Ninepoint Energy

The pick: MEG Energy Corp. (MEG-TSX)

52-week range: $3.87 to $11.51 a share

MEG Energy is a pure play oil-sands producer that is a “go-to stock for anyone bullish on oil,” Mr. Nuttall says. “We think oil is heading over US$100 per barrel next year. We think the market is and will remain undersupplied, and inventories will reach their lowest level in history by the end of next year.”

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The Calgary-based firm offers the “highest EBITDA [earnings before interest, taxes, depreciation and amortization] leverage to an increasing oil price of any stock in Canada,” he says. EBITDA should rise by 40 per cent for every $10-move higher in oil, he adds.

MEG Energy, which raised $1.6-billion from an asset sale, is investing in $275-million to expand its Christina Lake project in Alberta. With production set to climb to 113,000 barrels daily by 2020, its rising free cash flow will help reduce debt faster, he adds. Using a US$80-$90 per barrel oil price, its stock could hit $18-$27 a share using a six-times multiple on EBITDA, he adds.

The pick: Athabasca Oil Corp. (ATH-TSX)

52-week range: 85 cents to $1.98

Athabasca Oil, a producer of heavy and light oil, is a compelling way to play rising crude prices, Mr. Nuttall says. In addition to its Alberta oil sands assets, the Calgary-based firm is also a natural-gas liquids producer focused on the Duvernay and Montney plays.

Athabasca, which is shopping some infrastructure assets, could do a deal soon, he says. It could emerge as “a debt-free company that offers significant leverage to an increasing oil price,” he adds.

Athabasca’s EBITDA could increase by 30 per cent for every US$10-move higher in oil, he adds. “We see the stock as incredibly undervalued.”

Assuming WTI trades at US$70, $80 or $90 per barrel, its stock could climb respectively to $3.50, $4.75 or $6 per share, he says. A risk is pricing pressure from a sale of 100-million shares owned by Norway’s Equinor ASA (formerly Statoil) at once, but that is not a near-term event, he adds.

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