Seven Up: Some of Canada’s sharpest money managers give us their energy sector picks
Read on to learn what the best minds in the energy industry are thinking
Given that this magazine has an undisguised – and unapologetic – appreciation for passive investing, you might think we’d shy away from stock picking. Not necessarily. After all, while stock picking may be more art than science, that doesn’t mean it isn’t fun to try, or that it isn’t helpful to know what the best minds in the industry are thinking. So we approached some of them. Here’s what they told us.
President, portfolio manager and managing director at Brickburn Asset
His pick: Manitok Energy (TSXV:MEI)
Manitok is one of the rare companies that have grown by the drill bit, rather than by acquisition. The company’s team worked the foothills region of Alberta together at a major company, then parlayed its expertise with Manitok’s play at Stolberg, where it drilled 17 successful wells. Although Stolberg is a long way from being fully exploited (there are at least 20 more locations to optimize primary recovery), the company increased its prospect inventory with a farm-in from a major company at Entice, Alberta. Manitok has identified more than 50 leads on the Entice lands using well log data and seismic data gathered by the major. Manitok trades for slightly over 2.5 times 2014 cash flow, has an ultra-conservative balance sheet with less than one year debt-to-cash flow, has visible production growth and will exit 2013 at 5,000 boe/d. Based on Manitok’s success to date and the prospectivity at Entice, there is no reason the stock should not command a premium to its peers. Our target price is $5.
Senior Portfolio Manager at Canoe Financial
His Pick: Storm Resources (TSXV: SRX)
Storm is a junior liquids rich natural gas company with operations in northeast B.C. We expect Storm to produce top quartile production and cash flow per share growth among its junior weighted peer group during the next 12 months. The company has spent the past few years delineating its solid land position (123 net sections) at Umbach and will now move into development mode in select sweet spot areas. We expect this to produce a positive step change in the well performance and costs.
Senior Vice-President And Portfolio Manager at First Asset
His Pick: Encana (TSXV:ECA)
For conservative investors, I would highlight Encana as a top pick. This is a stock that after languishing for several years is finally starting to become interesting. Under Doug Suttles’ leadership, the firm has finally addressed investor concerns by committing to live within its means, narrowing the company’s focus from over 20 core areas to five, and initiated a disposition process for its non-core assets as well as planned an IPO for its Clearwater fee lands. All this coupled with a corporate headcount reduction and a dramatic reduction in the dividend from $0.20 to $0.07 positions the company for future growth.
Portfolio Manager at Sentry Investments
His Pick: Tamarack Valley Energy (TSXV:TVE)
The company is small enough to be off the radar of most investors, but over the last couple years my confidence in Brian Schmidt and his team has really gone up. The company has a $192 million market cap, so it’s pretty small, but Brian’s pretty plugged into the Calgary scene. He recently pulled together a really significant farm-in deal with a major, and on the operations side the company has hit the ball out of the park and well results have been good. And it consistently under-promises and over-delivers, which is what you want out of a producer.
Senior Investment Advisor at Canaccord Genuity Wealth Management
His Pick: Painted Pony Petroleum (TSE:PPY)
I’m cautiously optimistic that one of these pending pipelines will get our Alberta reserves to tidal markets. If that does happen, one of the major benefactors might be Painted Pony Petroleum. Painted Pony is focused on the Montney in northeast B.C., and Canaccord analyst Anthony Petrucci says the recent sale price of Talisman’s Montney assets in the same region implies a large hidden value for Painted Pony’s stock. We think the Talisman sale, with the sale of a portion of Enerplus’s Montney assets and other LNG related announcements (particularly Cnooc securing land on the West Coast and the B.C. government’s upcoming announcement on an LNG export tax), all point to increased activity surrounding LNG projects in BC.
Portfolio Manager at Trivest Wealth Counsel
His Pick: Paramount Resource (TSE:POU)
We have been positioning the TWC Risk-Managed Canadian Energy fund
towards a higher weighting in natural gas. There is a better risk-reward profile compared to crude oil and other energy commodities. A cold winter could provide near-term upside while the overall fundamentals backstopping natural gas will improve upon the build out of LNG export capacity in North America. We like Paramount for its exposure to rising natural gas prices, a strong management team that owns roughly half of the company and its concentrated positioning in the Deep Basin, which offers liquids-rich natural gas exposure.
President, Ceo And Portfolio Manager at Cypress Capital
His Pick: Crocotta Energy (TSE:CTA)
Management has shown a strong ability to add production and cash flow through prudent capital management. The company still trades at a discount to its peers. In 2014, we think it will average 10,500 boe/d (33 per cent liquids) and produce $0.80 to $0.90 of CFPS and see them eventually trading with their peers in the 5.8- to 6.0-times EV/DACF range. The Cardium and Bluesky at Edson continue to be very economic, especially when considering the cost control associated with owning the nearby facilities and pipelines. We think the market is ignoring the Montney upside at Dawson and believe any news here could be a positive catalyst for the stock.
Want more? Click here to read what AltaCorp Capital’s Jason Sawatzky has to say about 2014.