Energy stocks: on the mend?
Also: First Energy says it's time to buy the pressure pumpers
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 email@example.com
by Max Fawcett
That’s what the Globe and Mail’s Boyd Erman suggests in a piece from earlier today. In it, he notes that “the discount is the smallest since October, and the underlying price of U.S. crude is even a touch stronger than it was five months ago. Natural gas prices surged last week to levels well beyond where they were last October. What’s more, the Canadian dollar has significantly dropped since then, which will add to the realized price in local currency for both oil and gas, which are traded in U.S. dollars.”
It all adds up, he says, to a much more bullish outlook for the energy sector than there was even a couple of months ago, when the spreads between WTI and Canadian heavy crude blew out to more than $40 a barrel. And while stocks in the sector have rallied, Erman suggests there may be more to come given that the last time this trifecta of narrowing spreads, rising prices and a falling Canadian dollar was in place (in late 2011) the oil and gas producers index was 10 per cent higher than it is today.
FirstEnergy also came out with a decidedly bullish note that suggested it might be time to load up on stocks in the beleaguered pressure pumping sector. It bumped up its price targets on Calfrac Well Services (TSE:CFW), Trican Well Service (TSE:TCW) and Canyon Technical Services (TSE:FRC) and upgraded the first two to outperform. Why? “We believe that the spike in natural gas prices last week that caused the rise in pressure pumping stocks is only beginning,” Kevin Lo wrote. “As the natural gas outlook continues, we believe such rise will continue to propel the stocks.” And while 4Q12 results were weak across the sector, Lo thinks pricing has already troughed in the U.S. and may be on the verge of doing the same in Canada for the pressure pumpers. If the trend of rising natural gas prices continues, they’ll be poised to improve both their volumes and their margins. “Should a shift begin such that there is more gas drilling versus oil,” Lo wrote, “we would expect increased utilization of fracturing equipment, which would lend itself to improvement in margins. Deep natural gas basins as a whole take more equipment than oil, which would bode well for the fracturing companies to increase utilization and margins.”
This shift won’t materialize overnight, Lo cautioned, but markets may not care about that if they see clear evidence of a shift in sentiment and direction. “Even if drilling was to start to rise today, the earliest rise in pumping activity won’t be seen until 3Q13 and the earliest the pricing improvements will not be until 4Q13. Nonetheless, we would believe that the market will trade ahead of this, and at this point, there is likely more upside than downside to the stocks.”
FirstEnergy has a $19 price target on Trican shares, a $35 target on Calfrac shares and a $14.50 target on Canyon shares.