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Black Monday

Gold gets hammered, and the energy sector gets caught in the downdraft. Also, picks from Middlefield Capital's Rob Lauzon

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

Apr 15, 2013

by Max Fawcett

It’s absolute carnage out there for anyone invested in gold, and the pain has spread into the energy space in the process. Oil was down almost three per cent on the day, although compared to gold’s 10 per cent swoon – yes, 10 per cent – that probably looks relatively tepid. Still, the root cause of the sell-off in gold – one of them, anyways – was weaker than expected economic data out of China, and that’s nearly as important to the energy sector as it is to Canada’s beleaguered gold producers.

Rob Lauzon, the managing director of western Canada for Middlefield Capital, was on Market Call this afternoon to talk about the energy sector. He noted that Renegade Petroleum’s (TSE:RPL) conversion into a dividend-paying company isn’t exactly going as planned, given that a sell-off in the company’s shares has pushed its dividend up near 17 per cent. “The market’s telling the company that this isn’t sustainable,” Lauzon said. “You can’t raise any more equity down here at a 17 per cent dividend – that kind of cost of capital is prohibitive.” The press release the company issued today announcing a “strategic review” of its options didn’t seem to calm investors, either. “It didn’t say whether the board is contemplating a dividend cut or selling the company,” Lauzon said. “It was very broad, and the market doesn’t like uncertainty. As you can see, the market is asking for more certainty.”

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His top picks for the sector were Crescent Point Energy (TSE:CPG), Crew Energy (TSE:CR) and Canadian Natural Resources (TSE:CNQ). He likes Crescent Point mostly for the dividend, which he thinks is safe given the company’s aggressive hedging strategy. “I think the stock’s a $40, $41 stock over the next 12 months, so the total return is compelling,” he said. With a beta of twice the overall TSX, Crew Energy definitely isn’t for the faint of heart, but he thinks it’s a good opportunity to step in for those with a strong stomach. “At these levels I think it’s cheap. It has some light oil but mostly heavy oil and natural gas play. They have lots of acreage in Alberta and the Montney. I think this stock is probably worth $8, $8.50 in the right market.” CNQ, finally, is attractive both in terms of its valuation and long-term upside. “They’re the largest landholder in the Montney, and one of the largest landholders in this new Duvernay play,” Lauzon said. “They’re not drilling much into it – they’re letting others delineate the play – but they have the most land. There’s all these embedded free options with CNQ, and at the same time they’re getting a well-priced stock. Under $30 has always been a good time to buy it.”

 

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