Encana’s Doug Suttles lays it down
Also: three more top picks in the oil and gas sector from Sprott's Eric Nuttall
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 firstname.lastname@example.org
by Max Fawcett
New(ish) Encana CEO Doug Suttles finally unveiled the strategic update the street was waiting for, and it’s a doozy. It includes a 65 per cent cut to the company’s quarterly dividend, a spinoff of its Clearwater mineral fee title lands and associated royalty interests, a 20 per cent reduction in its workforce and a $2.5 billion 2014 cap-ex budget that will focus squarely on its liquids-rich properties in the Montney, the Duvernay, the DJ Basin, San Juan and Tuscaloosa Marine Shale. Many of those workforce reductions will take place in the U.S., where Encana will be closing its Texas office, but its operations in Alberta stand to be slimmed down as well. Analysts and investors alike seem to approve of the plan, with shares trading slightly up this morning.
Sprott Asset Management’s Eric Nuttall made a midday appearance on BNN yesterday, and as always came armed with some intriguing insights for oil and gas investors – and a healthy dose of bullishness. He thinks 2014 will be a good year for energy investors, and particularly those more heavily exposed to oil prices, which he thinks will remain strong. In terms of company-specific observations, he likes the risk-reward proposition that’s currently available to investors with Athabasca Oil (TSE:ATH). Its acreage in the Duvernay, which amounts to 200,000 net acres, could be worth nearly as much as its current share price if one assesses them based on the recent Chevron transaction in the region. And he is still “highly optimistic” that it will get the approval it needs to collect the proceeds of its put agreement with PetroChina. “When you’re investing you’re always making an educated bet. My bet is that they’ll either settle or the Alberta government will grant approval and they’ll be able to exercise the put. As an educated betting man, I think the risk to reward is extremely favourable – but it’s a very high-risk name.”
Whitecap (TSE:WCP) is another name he likes, noting that the company’s forthcoming quarterly report should show positive free cash flow, and as such could include an increase to its dividend or an increase to its 2014 cap-ex budget. He also likes the philosophical underpinnings of that growth. “What I love is that everyone at the company, from the personal assistants to the CEO to the Chairman – everybody – has to own stock. So everyone at the company is aligned with the shareholders’ interests because they are shareholders.”
In terms of his top picks for the day, Nuttall singled out Crescent Point Energy (TSE:CPG), which he says is about as safe (and sound) a bet as there is in the oil patch right now. “I think you could get another 10 per cent of capital appreciation, and collect a seven per cent dividend while you’re waiting,” he said. Nuttall expects the company to increase its guidance for the year ahead, and noted that even with the dilution that comes from its DRIP program it’s still growing production on a per-share basis, and as the decline rate on its wells comes down it should start to bring down its payout ratio – one that has some analysts and investors concerned.
He tapped Bellatrix Exploration (TSE:BXE) for its demonstrated capacity to raise money when needed and its first-move edge in the Cardium and Notikewin plays, where its ability to drill cheaper and better wells gives it “astounding” rates of return on invested capital. It’s growing production by 35 per cent this year, and he thinks it could repeat that feat in 2014. “The stock’s been drifting because a lot of analysts have been on blackout from their last deal,” he said. “I think as you get more coverage coming you’ll see the reaffirmation of $10 or $11 targets.”
Finally, he likes Tourmaline Oil (TSE:TOU), which he called another “sleep at night” story. The company’s Charlie Lake play could end up doubling its reserves, and like Bellatrix it’s growing its production at a healthy clip this year and should do the same in 2014. With a rock-solid balance sheet and drilling catalysts on the horizon, Nuttall thinks the company could be due for some multiple expansion. And while there’s a 10 per cent net short interest on the stock, Nuttall suggested that investors not fret that – it comes with the territory of being a premium name like Tourmaline.