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Canadian energy stocks: time to load up?

Also: Twin Butte energy runs into trouble

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Feb 5, 2013

by Max Fawcett

After plunging more than 15 per cent on Friday, shares in Twin Butte Energy (TSE:TBE) started the week on a more even keel, closing up a couple of pennies. The junior producer got hit on Friday after issuing a profit warning on Thursday afternoon that it was having operational difficulties that would have a “significant” impact on its cash flow. Production at its Primate property in Saskatchewan, which had been one of its best-performing assets, dropped by almost 1,000 barrels per day (compared to peak production of 3,400 barrels per day) since the end of 2012. That hiccup, combined with persistently low prices for heavy oil and some operational downtime associated with extreme cold over the last few weeks, is expected to reduce its first quarter cash flow to just $30.5 million. In response, the company said it will reduce capital spending for the remainder of the year by 23 per cent in an effort to conserve cash and continue to pay out its dividend. But judging by the market’s reaction on Friday, investors may not be so sure about that.

Notwithstanding Twin Butte’s problems, the energy sector is looking good to one investor. Martin Pelletier, a portfolio manager at Calgary’s TriVest Wealth Counsel, wrote in a piece published in the Financial Post last week that “Canadian energy has a core strategic value that is simply not being reflected in the current public markets, making it one of the best investing opportunities I’ve seen in more than a decade.”

He admits that it’s a classic contrarian play, given the negative sentiment towards the sector and particularly heavy oil right now. His thesis isn’t an entirely foreign one to investors in the space, but it’s one that bears repeating given the fact that share prices for many Alberta energy companies are perilously close to their 2009 lows. First, he sees energy companies as a useful hedge against any potential inflation, and notes that many companies compensate their investors for their patience at a rate that is anywhere from three to six times the prevailing rate on 10-year Government of Canada bonds.

Pelletier also thinks the headline risk over Canada’s lack of pipeline capacity and the discount that has hit some producers hard is overstated. “The Seaway pipeline has been reversed to alleviate the glut at West Texas, Keystone is looking likely to be approved, and some of the recent refinery outages will be resolved. This sets the stage for Canadian oil prices to recover,” he says.

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Finally, he notes that while retail investors have been fleeing the sector, private equity and state-owned enterprises continue to make strategic acquisitions, often with premiums as high as 100 per cent. That’s particularly true in the natural gas space, where patience will be rewarded, he says.

 

 

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