Investors look to oilpatch to fuel returns
David Pett, Financial Post
Published: Monday, April 14, 2008
http://www.financialpost.com/story.html?id=445331
Tyler Brownbridge/Canwest News ServiceEconomist Jeff Rubin says the TSX oil and gas index should be trading about 35% above current levels.
Expectations are high on the Street these days that stocks from the oilpatch can fuel solid returns for investors and help drive the S&P/TSX Composite to new heights in 2008.
Jeff Rubin, chief strategist and chief economist at CIBC World Markets, recently estimated that energy stock valuations appear to price crude oil at about US$75 a barrel, 25% lower than the approximately US$100 commodities market value.
Consequently, he said in a report the TSX oil and gas index should be trading about 35% above current levels.
Those attractive valuations only look prettier given predictions of an active M&A market over the coming months, and with solid opportunities seemingly around every corner, the only question that remains is how best to play the game? A definitive list it is not, but here are a few suggestions to get you started.
Large Caps: Talisman Energy Inc. (TLM/TSX) is a stock that has been hindered by the short reserve life of the company's resources, and over the past two years shares are virtually unchanged at a value that remains well below its peers. But with new CEO John Manzoni on board and a strategic review in motion, the stock has caught some momentum, rising almost 20% over the past month.
Many analysts, including Genuity Capital's Philip Skolnick figure Talisman shares are well positioned to move further on up. "[Mr. Mazoni] understands that assets with short reserve lives don't work for a company this size," Mr. Skolnick said. "What they need to do is focus on long-life resource plays."
Luckily, he adds, Talisman won't have to make a big acquisition to do that, because in North America it has huge land positions in five key resource plays that people are starting to hear about, including the Outer Foothills in Alberta, the Montney shale in B.C., the Marcellus shale play in the northeastern United States, the Utica shale in Quebec and the Bakken in southern Saskatchewan.
Mr. Skolnick is confident that by concentrating its efforts on these plays, Talisman will be able to increase its overall reserve life over time, noting "the market has been rewarding companies who make that kind of strategic shift."
Analysts also like Suncor Energy Inc. (SU/TSX) and Canadian Natural Resources Ltd. (CNQ/TSX) in the large-cap space. Of Canadian Natural, Mr. Skolnick notes that the company's Horizon project is expected to come on line in the third quarter of this year and will reach peak production sometime in 2009 of 110,000 barrels of oil per day. At US$85 a barrel, Mr. Skolnick said, CNQ will generate $1-billion in free cash flow. "Try and find another company out there with a significant near-term project about to come online like Horizon," he said.
The trusts: Thanks to attractive yields in volatile times, energy trusts have done their part, and then some, in driving overall positive, if slight, valuations in the energy sector over the past quarter. Among the myriad "buy" recommendations from analysts who cover the sector, Bonavista Energy Trust (BNPu/TSX) gets great props from all but two analysts who have "sell" ratings on the units.
"Great yield, great management, great company. It's probably our best pick on the trust side" said UBS analyst Grant Hofer. But it's oily weighted Baytex Energy Trust (BTEu/TSX), he said, that offers great momentum for investors right now.
"There's a real heavy-oil story at the moment with heavy oil basically selling for the same price as light oil compared to the 30% discount it usually trades at."
With 60% of Baytex production coming from its heavy-oil assets. Mr. Hofer said nothing comes to mind as a better play on heavy oil prices. He also likes Vermilion Energy Trust (VETu/TSX) for its very conservative 35% payout, strong balance sheet and diverse international operation.
He also said Vermilion will at some point do something with its 42% stake in Libya-based Verenex Energy Inc., giving the stock great option value going forward."
The intermediates A consolidation trend in the junior and intermediate explorer and producer sector is giving new hope to the mid-cap sector following a disappointing 2007.
Canaccord Adams analyst Wendy Liu says reduced access to capital, existing financial pressures and uncertainty concerning the effect of the proposed Alberta fiscal changes is creating a "bigger is better" mentality with new, larger entities worthy of investment being created to fill the mid-cap tier.
Ms. Liu sees no shortage of good names in the space and recently initiated coverage with "buy" ratings on three companies that have bought their way up to the 20,000-barrels-of-oil mark through corporate transactions in recent months.
She said the recent acceleration in merger and acquisition activity, specifically at the Bakken Formation in southeast Saskatchewan is particularly relevant for TriStar Oil & Gas Ltd. (TOG/TSX), which she tagged with a price target of $18 upon initiation. "TriStar holds the third-largest acreage position prospective for the Bakken. It has demonstrated its prowess at acquiring others, but there exists the distinct possibility that it, too, will be bought by a larger entity given the strategic positioning of its asset base. The analyst also likes Iteration Energy Ltd. (ITX/TSX) and NuVista Energy Ltd. (NVA/TSX), whose 12-month price targets of $7.50 and $20, respectively, represent upside of more than 20%. "In our view, the market is not recognizing that the respective fundamentals for Iteration and NuVista are solid," she wrote.
Small caps What with trust taxation, high services costs, low gas prices and Alberta's royalty review, the list is long on negative issues that have impacted the small-cap energy scene over the past two years, with investors turning tail, unwilling to deal with the hiccups that often arise at companies in the sector.
As a result, Wellington West analyst Kim Page said full-cycle exploration companies with long lead times onto production easily get lost in the shuffle, even those with high netback and long-life assets.
"The result is value creation goes unnoticed," he wrote in a recent note to clients. "Concurrent commodity price increases can accelerate value attrition."
He flags Rock Energy Inc. (RE/TSX) among his favourite small-cap plays, rating the emerging oil-and-gas company with assets in Alberta and British Columbia a "strong buy" with a $4.75 price target. The stock continues to trade at a significant discount to its $5-a-share net asset value, he told clients, adding the company's active drilling program slated for the second half of 2008 should increase the company's to 4,100 barrels of oil a day.
He also lists Alberta Clipper Energy Inc. (ACN/TSX) and Arcan Resources Ltd. (ARN/TSXv) as good-quality small-cap companies with strong assets, management teams and in solid financial postion and suggests investors begin building diversified positions ahead of the Alberta government's announcement confirming royalty rates under the New Royalty Framework now expected in some time later in May or June.
"We believe some relief will be provided and act as a catalyst to revalue these stocks."
David Pett, Financial Post
Published: Monday, April 14, 2008
http://www.financialpost.com/story.html?id=445331
Tyler Brownbridge/Canwest News ServiceEconomist Jeff Rubin says the TSX oil and gas index should be trading about 35% above current levels.
Expectations are high on the Street these days that stocks from the oilpatch can fuel solid returns for investors and help drive the S&P/TSX Composite to new heights in 2008.
Jeff Rubin, chief strategist and chief economist at CIBC World Markets, recently estimated that energy stock valuations appear to price crude oil at about US$75 a barrel, 25% lower than the approximately US$100 commodities market value.
Consequently, he said in a report the TSX oil and gas index should be trading about 35% above current levels.
Those attractive valuations only look prettier given predictions of an active M&A market over the coming months, and with solid opportunities seemingly around every corner, the only question that remains is how best to play the game? A definitive list it is not, but here are a few suggestions to get you started.
Large Caps: Talisman Energy Inc. (TLM/TSX) is a stock that has been hindered by the short reserve life of the company's resources, and over the past two years shares are virtually unchanged at a value that remains well below its peers. But with new CEO John Manzoni on board and a strategic review in motion, the stock has caught some momentum, rising almost 20% over the past month.
Many analysts, including Genuity Capital's Philip Skolnick figure Talisman shares are well positioned to move further on up. "[Mr. Mazoni] understands that assets with short reserve lives don't work for a company this size," Mr. Skolnick said. "What they need to do is focus on long-life resource plays."
Luckily, he adds, Talisman won't have to make a big acquisition to do that, because in North America it has huge land positions in five key resource plays that people are starting to hear about, including the Outer Foothills in Alberta, the Montney shale in B.C., the Marcellus shale play in the northeastern United States, the Utica shale in Quebec and the Bakken in southern Saskatchewan.
Mr. Skolnick is confident that by concentrating its efforts on these plays, Talisman will be able to increase its overall reserve life over time, noting "the market has been rewarding companies who make that kind of strategic shift."
Analysts also like Suncor Energy Inc. (SU/TSX) and Canadian Natural Resources Ltd. (CNQ/TSX) in the large-cap space. Of Canadian Natural, Mr. Skolnick notes that the company's Horizon project is expected to come on line in the third quarter of this year and will reach peak production sometime in 2009 of 110,000 barrels of oil per day. At US$85 a barrel, Mr. Skolnick said, CNQ will generate $1-billion in free cash flow. "Try and find another company out there with a significant near-term project about to come online like Horizon," he said.
The trusts: Thanks to attractive yields in volatile times, energy trusts have done their part, and then some, in driving overall positive, if slight, valuations in the energy sector over the past quarter. Among the myriad "buy" recommendations from analysts who cover the sector, Bonavista Energy Trust (BNPu/TSX) gets great props from all but two analysts who have "sell" ratings on the units.
"Great yield, great management, great company. It's probably our best pick on the trust side" said UBS analyst Grant Hofer. But it's oily weighted Baytex Energy Trust (BTEu/TSX), he said, that offers great momentum for investors right now.
"There's a real heavy-oil story at the moment with heavy oil basically selling for the same price as light oil compared to the 30% discount it usually trades at."
With 60% of Baytex production coming from its heavy-oil assets. Mr. Hofer said nothing comes to mind as a better play on heavy oil prices. He also likes Vermilion Energy Trust (VETu/TSX) for its very conservative 35% payout, strong balance sheet and diverse international operation.
He also said Vermilion will at some point do something with its 42% stake in Libya-based Verenex Energy Inc., giving the stock great option value going forward."
The intermediates A consolidation trend in the junior and intermediate explorer and producer sector is giving new hope to the mid-cap sector following a disappointing 2007.
Canaccord Adams analyst Wendy Liu says reduced access to capital, existing financial pressures and uncertainty concerning the effect of the proposed Alberta fiscal changes is creating a "bigger is better" mentality with new, larger entities worthy of investment being created to fill the mid-cap tier.
Ms. Liu sees no shortage of good names in the space and recently initiated coverage with "buy" ratings on three companies that have bought their way up to the 20,000-barrels-of-oil mark through corporate transactions in recent months.
She said the recent acceleration in merger and acquisition activity, specifically at the Bakken Formation in southeast Saskatchewan is particularly relevant for TriStar Oil & Gas Ltd. (TOG/TSX), which she tagged with a price target of $18 upon initiation. "TriStar holds the third-largest acreage position prospective for the Bakken. It has demonstrated its prowess at acquiring others, but there exists the distinct possibility that it, too, will be bought by a larger entity given the strategic positioning of its asset base. The analyst also likes Iteration Energy Ltd. (ITX/TSX) and NuVista Energy Ltd. (NVA/TSX), whose 12-month price targets of $7.50 and $20, respectively, represent upside of more than 20%. "In our view, the market is not recognizing that the respective fundamentals for Iteration and NuVista are solid," she wrote.
Small caps What with trust taxation, high services costs, low gas prices and Alberta's royalty review, the list is long on negative issues that have impacted the small-cap energy scene over the past two years, with investors turning tail, unwilling to deal with the hiccups that often arise at companies in the sector.
As a result, Wellington West analyst Kim Page said full-cycle exploration companies with long lead times onto production easily get lost in the shuffle, even those with high netback and long-life assets.
"The result is value creation goes unnoticed," he wrote in a recent note to clients. "Concurrent commodity price increases can accelerate value attrition."
He flags Rock Energy Inc. (RE/TSX) among his favourite small-cap plays, rating the emerging oil-and-gas company with assets in Alberta and British Columbia a "strong buy" with a $4.75 price target. The stock continues to trade at a significant discount to its $5-a-share net asset value, he told clients, adding the company's active drilling program slated for the second half of 2008 should increase the company's to 4,100 barrels of oil a day.
He also lists Alberta Clipper Energy Inc. (ACN/TSX) and Arcan Resources Ltd. (ARN/TSXv) as good-quality small-cap companies with strong assets, management teams and in solid financial postion and suggests investors begin building diversified positions ahead of the Alberta government's announcement confirming royalty rates under the New Royalty Framework now expected in some time later in May or June.
"We believe some relief will be provided and act as a catalyst to revalue these stocks."
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