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Oil. Price of oil has been high and will remain high. For the first time in quite a while, we are now seeing a repatriation of funds out of the US into Canada. Especially if you consider the impact of a depreciating loonie, the price of oil in Canada now sells for more than it does in the US. Yet over the past 2 years, Canadian oil companies have greatly lagged its US peers. We are starting to see a catch-up occur and this is what excites him the most. Prefers the producers over the services.
Drilling results were not stellar and the stock fell about 25% on the day they announced the results. This is a natural gas company with 2 core areas. On the one they have been having good development success. Drilling very expensive wells, but rates of return seem to be very good. Have grown production up to about 1700 BTUs a day so on a run rate basis, that produces about $25 million of cash flow, so the stock is trading at around 4X cash flow. Market was disappointed on the initial drilling results from another area which was an untested Montne trend where they were pushing the fringe of the boundaries. If it had worked, it could have been very, very exciting. They couldn’t test the wells because of the sour contents. This means they need to retest after breakup by bringing on better equipment. Even if they get a productive rate, the cost to produce sour gas is much more than sweet gas, about 4 times. Cautious on the name as the risk is too high.
Really likes this. Should be having a drilling update by the end of this month, which is their first 2 wells which is kind of proof of concept to the play that they acquired from Penn West (PWT-T). Liked that the stock came out at a very cheap valuation when they IPO’d late last year. The market has since given them a currency to use their stock to go aggregate further assets, which he guesses they have done subsequent to the year end. Pending positive well results, he expects the stock could further increase. By his numbers, it is trading very cheaply at roughly 5X next year’s enterprise value to cash flow. Given the nature of the wells they are drilling, if they come on as robust as management has been guiding, it probably has the most sustainable dividend model of any oil/gas company in Canada. Dividend of almost 5%.
Essentially a pure play in Colombia where they’ve had pretty good drilling success. 18,000 barrels a day and lots of land to drill. The knock against the company has been the very short reserve life, meaning the reservoirs in Colombia are very different from those in Canada. This leads to high productivity in a very short reserve life. The burden on a company to continually add more and more reserves through the drill bit is much higher than it would be in Canada. Since they been so successful last year, they’ve increased their reserve life to 7 from around 4.5, which is a positive. However, it is now trading at a premium to its booked reserve value so you are starting to attribute some value to its exploration, which is fine, but when you contrast this opportunity to some things in Canada, the overall feel of economics is superior in Canada to Colombia. Prefers others.
Delphi Energy (DEE-T) or Painted Pony (PPY-T)? Doesn’t own either. In terms of natural gas names, he is looking at them potentially having weakness so he wants greater liquidity, meaning larger market as opposed to small caps. Both of these are very good companies. This one has been remarkably successful at improving how they been drilling their wells in an area called Big Stone, where just by a few different tweaks they really unlocked the economics for their drilling wells that are coming on, probably at a function of 3 or 4 times greater than they were 1.5 years ago. There is some uncertainty as to how they fund their growth. Debt has been going up recently.
Delphi Energy (DEE-T) or Painted Pony (PPY-T)? Doesn’t own either. In terms of natural gas names, he is looking at them potentially having weakness so he wants greater liquidity, meaning larger market as opposed to small caps. Both of these are very good companies. On this one, the key difference is the liquids content of the wells, the amount of condensate and fluids that come along with production making better economics.
(A Top Pick April 17/13. Up 19.07%.) Still likes this. It is a frustrating name because it feels like the name is kind of stuck. Very well owned in Canada and they really need to rely on the incremental buyer from the US coming into the name. Have a very sustainable dividend becoming more sustainable in time as their capital efficiencies improve and their decline rates fall with the implementation of water flood. Just listed in New York.
(A Top Pick April 17/13. Up 52.33%.) There is still more to go. Still very inexpensive. Reported last week and the stock fell which he found peculiar. Sitting on a 10 year inventory of Cardium, which is fairly well delineated now. Feels they have the 2nd most sustainable dividend model in Canada. They can grow production by 10% and pay a 5% dividend. Can see $13 in one year.
(A Top Pick April 17/13. Up 33.45%.) Even though there seems to be a weakness in the commodity of natural gas, you can still make money in a company that produces the commodity. This is heavily weighted towards natural gas. What he likes is that you are buying into the best management team in the business when it comes to natural gas and sitting on some of the best acreage in Canada. Their production rate far exceeds the national average. Thinks they will be able to grow production by 70% this year and upwards of 35% in 2015. He has the stock valued at roughly 6.7X next year’s enterprise value cash flow. Historically this company trades at about 8. As we get closer to year end, people will realize just how cheap it is and he is expecting it to be a $60 stock
Stock has been weak over the past month because of their 19% acquisition of Longview (|LNV-T). They are hoping to do a merger. The street felt Longview didn’t have the greatest quality of assets and yet Surge had built its reputation on acquiring “elite” assets. His impression is that this is not as good a company as it was before because of the acquisition. 8.9% dividend is sustainable but the stock has lost a tremendous amount of momentum. Really doesn’t see this stock outperforming.
There are a few dynamics in the story that might challenge the stock price from reaching $10.62 a year from now. Shareholder base largely consists of New York hedge funds as opposed to fundamental buyers. That community needs to sell eventually to realize again on a trading catalyst. This is a stock that you need to be really on top of. Risk/reward is not worth the gray hair.
Could very well be a takeover target. Have a very large land spread in the Duvernay which is being drilled by the likes of Chevron and Shell. Just came out with stellar results last week. Has had a decent run. If there was a joint venture or a corporate sale, you could see $35 but it comes down to the selling motivation of a family that has a controlling stake in it. There will be more drilling results as the year progresses and the stock may go up on drilling results. Very much a catalyst driven stock.
Not a name that he is comfortable with. Lost their key geological person who took them into the disturbed (???) Foothills trend where they had a remarkable amount of success. Their development inventory in that play is shrinking and they’ve since farmed in on Encana (ECA-T) which presents a whole new element of risks. Stock appears to be cheap on current production but cheap stocks usually are more expensive than you thought because production does not quite grow at the same pace.
Gas. A little more optimistic on the longer-term outlook for oil than he is for natural gas. Gas has benefited from the weather which has been remarkably cold, and as a result we have burned much more gas this year than we did last year, which has led to very low storage levels. US is going to be about 850-900 billion cubic feet deficit. Alberta storage is at the lowest since 2004, which is creating a lot of short-term price strength for natural gas. His concern in the near-term is at we are now entering a period where the peak demand for natural gas calms because we don’t have to heat our homes as much. At that point, we can now revert to more coal fuelled power generation and right now, because gas has been so strong and the price of coal has been so weak, he feels we could see some very material switching that the market is not appreciating. Looking out to the fall, we’ll probably see another strengthening of natural gas but a little cautious over the next 3-4 months.