- Despite mostly upbeat Q2 results, my stock picks aren’t moving higher.
- Sentiment is still negative in the energy market, capping energy stocks gain.
- Painted Pony and Point Loma are underperforming.
- Prairie Provident and Granite Oil are my two favorite buys right now.
- Last week’s sell-off was a one time event: Stability in the oil market should return.
- Selling overleveraged and low netbacks oil producers.
- Adding to my favorite Canadian E&Ps.
Last Wednesday was a test for energy investors. Did you resist the urge of following the masses by selling your energy holdings?
I resisted. I added to my favorite energy holdings last Wednesday, which are Gear Energy (GXE), Point Loma Resources (PLX) and Raging River Exploration (RRX). Those companies can survive low oil prices and then thrive once oil prices rise.
Here are my recent moves in the market.
First, I sold all the lithium explorers I bought last month: Critical Elements (CRE), Nemaska Lithium (NMX) and Natan Resources, now Enforcer Gold (VEIN). I was lucky to turn out a profit on this: Critical Elements skyrocketed 50% after investors learned the company had hired a communication firm for a year.
This experience would be cash neutral at best if it wasn’t for this gain. Just for example: Enforcer Gold switched its focus to gold exploration after I bought the stock for its lithium properties. All in all, this is another point to not speculate on the market.
Second, I sold TransGlobe Energy (TGL). It turns out the Canadian assets aren’t as transformative as I thought they would be. I first estimated netbacks at C$11.50 per barrel for total consideration of 6X 2017 FFO. Instead, netbacks were as low as C$6 per barrel in Q4, which implies an estimated price tag of over 10X 2017 FFO.
The Cardium light oil acreage should provide interesting returns according to past presentations from Angle Energy. Management will drill these lands only in late 2017. Therefore it will take some time before shareholders see something good from these assets.
I sold what was left of my position in MEG Energy (MEG) for a sub-50% gain. WTI at sub-$50 won’t be enough for MEG to sell its pipeline at a good price. Hence share price appreciation will be limited in the short-term.
I added massively to my positions in Point Loma Resources, Gear Energy and Raging River Exploration using these gains.
I bought back Tidewater Midstream and Infrastructure (TWM) on Friday after selling the stock two weeks ago. Support was limited below the 200-day moving average.
Low AECO prices in Western Canada may delay growth projects by producers and lower flows in pipelines owned by TWM in the short-term.
I am now heavily positioned in the oil and gas sector with a strong presence in junior Canadian E&Ps with low leverage and high netbacks. Those companies can survive at $50 WTI and thrive at higher prices.
Disclosure: I am long GXE, PLX, RRX, TWM. Not for republication on Seeking Alpha.
I am now well positioned for 2017 after another series of move in my portfolio.
- I added to my positions in Painted Pony Petroleum (PPY) and in Gear Energy (GXE) by selling part of my position in MEG Energy (MEG). I am preparing my portfolio for lower oil prices.
- I opened a position in Tidewater Midstream & Infrastructure (TWM).
- I bought back shares in TransGlobe Energy (TGL). TransGlobe’s Canadian transformation is a game changer to me. Plus the acquisition metrics are very good for TransGlobe shareholders.
- I opened a position in Point Loma Resources (PLX).
I made a quick analysis for Point Loma Resources after hearing about the stock on Seeking Alpha. The stock is indeed trading at a very low 6.3X Year-End 2016 FFO. I estimate FFO of C$17.92 per barrel at year-end 2016. Furthermore, the company holds no debt except for convertible debentures and plans to grow production aggressively next year. In other words, the multiple should be higher.
Lower heavy crude from Venezuela will benefit Canadian heavy oil and tighten the price differential of Canadian heavy oil versus WTI.
Finally, the new push for natural gas pipelines in the Northeastern US will force TransCanada to lower its transportation tariffs. Else it will face a severe decrease in its market share in Eastern Canada.
Disclosure: I am long GXE, MEG, PLX, PPY, TGL, TWM. Not for republication on Seeking Alpha.
- DUCs completion rate will reverse dramatically.
- This scenario would lead to growth of 500,000 bbl/d.
- I am less inclined to say that oil will rise substantially in 2017.
I raised cash after selling part of my Amaya position (I bought back some, as I said on StockTwits). To let you know: I already spent that cash on Gear Energy last week. My quick calculations were right: Gear Energy is cheap.
I will be looking for a solid balance sheet just in case the rout in oil prices continues. As you know, I already own MEG Energy, a leveraged E&P company. One is enough.
I made a basic stock screening of Canadian oil E&P companies (75% or more liquids production) with low debt (total debt on equity needs to be under 30%).
Unleveraged Oil E&P - TSX Screening
|TSX Tickers||Net debt (C$M)||EV (C$M)||FFO (C$M)||Net debt/FFO||EV/FFO|
Source: Corporate presentations and my own work.
I already own Raging River Exploration. I will include the company in today’s comparison nonetheless. I have been handsomely rewarded by holding on Raging River Exploration, let’s try and repeat that.
As you know, I need an unlevered company. Gear Energy is an unlevered company in disguise for three major reasons:
First, 38% of Gear Energy’s debt is convertible to equity. The extra dilution from these convertible debentures is included in the EV/CF ratio.
Second, Gear Energy’s cost profile will improve. Indeed, the company purchased Striker Energy, a light oil producer in Western Alberta. This will increase corporate netbacks by over 25%.
Finally, Gear Energy plans to increase production by 10% next year while holding debt steady.
The additional cash flow and decreasing leverage warrant a higher EV/CF ratio. Furthermore, Gear Energy’s transformation is complete after multiple dilutive equity placements.
The company took care of its balance sheet and bought a light oil producer to diversify its production away from heavy oil. It also has an incredible board member in Neil Roszell (CEO of Raging River Exploration), which I know well.
I will update the table above with estimated numbers for next year. I believe the picture will be even clearer.
In conclusion: I’ll buy the dips.
Disclosure: I am long GXE. Not for republication on Seeking Alpha.
- 14 million barrels are gone from commercial stocks.
- U.S. liquids inventory are at record high.
- OECD non-U.S. liquids inventory are slightly above normal.
- Data is hard to come by, contributing to the confusion.
- Each oil producers’ fortune differs depending on fundamentals.
- Demand is still extraordinarily high.
- Inventory remains very high, especially in the U.S.
- U.S. shale oil and to a lesser extent Russia are emerging as winners.