The other problem in the Middle East
Also: AltaCorp Capital's Jeremy McCrea makes the case for Bellatrix Exploration
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
Oil prices continue to remain high, and while it’s due to events in the Middle East it might not be the ones you’re thinking of. Yes, Syria remains in the headlines, but it’s the plummeting oil production in Libya that’s helping lift Brent and WTI. According to AltaCorp’s latest research note, the country’s production has fallen below 100,000 barrels per day – a two year low, and a staggering drop from the 1.6 million barrels per day it was producing when Muammar Gaddafi was removed from office. That production has been replaced by Saudi crude, but because it’s of a different quality (medium heavy/sour grade rather than Libya’s light sweet crude) it’s pushing out differentials between heavy and light crude.
Meanwhile, AltaCorp’s Jeremy McCrea highlighted Bellatrix Exploration (TSE:BXE) as his top pick for the fall. As he noted, it’s not a new name for them – they had it as the top pick at the beginning of 2013, and the story remains the same. Why? It’s one of the least leveraged names in the space, with debt-cash flow of just 0.8 for 2014, but it’s still growing at a remarkable clip, with expected growth of cash flow per share of 50 per cent and production per share of 40 per cent in 2014. It also has a strong management team, an inexpensive valuation (an expected EV/DACF ratio of 3.6 for 2014) and asset economics that are nearly unparalleled in the patch. For example, its Notikewin joint-venture wells pay back within two months, while its Cardium wells do so in eight. With more than 15 years of drilling targets, McCrea says the company “should continue tremendous growth for the forseeable future.” In addition to its proven ability to grow cash flow and production on a per-share basis, it may benefit from a multiple expansion once it reaches the $1 billion market cap threshold and becomes available to larger institutional investors. McCrea has a $10 price target on Bellatrix shares.
And last week, Genevieve Roch-Decter, a portfolio manager with LDIC, swung by the BNN studios to talk about energy infrastructure companies on Market Call. Two of her top picks were Alberta companies, and they were headlined by Badger Daylighting (TSE:BAD), a company with a ticker symbol that belies its recent performance. In its most recent quarter it grew its EBIDTA by almost 50 per cent on a year-over-year basis, and despite its performance over the last year (up more than 100 per cent) Roch-Decter thinks there’s still room for it to run. “It’s just going to keep chugging along. It’s trading at an eight-times multiple, and I think it deserves a 10-times multiple. It’s been consistently showing growth, and it’s not a volatile stock.” She also picked Inter Pipeline Fund (TSE:IPL), which is her firm’s largest holding and one of her favourites for its ability to add new contracts and projects without diluting shareholders or over-leveraging its balance sheet. The fact that it recently converted into a corporation should be positive for shareholders, as it will allow U.S.-based investors to buy the stock for the first time. She thinks its shares will reach $30 by 2016.