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Brent Crude: Is the real risk to the upside?

That's certainly what a recent geopolitical development (and no, it's not the one you're thinking of) has one market watcher worried about. Also, two small-cap picks from Bruce Campbell

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

Aug 28, 2014

by Max Fawcett

For all the geopolitical turmoil in the Middle East, Brent crude prices have remained stubbornly – and surprisingly – soft. But as the Telegraph’s business editor, Andrew Critchlow, wrote in a recent piece, that might be because the market is missing the real risk. ISIS may be collecting millions of dollars a day from the oil fields that it’s captured, but that may not be long lived. The breakdown in the relationship that has largely underwritten whatever stability the Middle East has enjoyed over the last 30-plus years, on the other hand, may be more permanent. That relationship is the Gulf Co-operation Council, which was formed in 1981 by six Arab monarchies (Saudi Arabia, Oman, the United Arab Emirates, Qatar, Kuwait and Bahrain) and controls approximately a fifth of the world’s oil supply today.

“Often criticized as being just a powerless club of oil-rich benign dictators, the GCC has arguably done more than any other institution to guarantee political and economic stability over the last 35 years in the region once dominated by warring Bedouin tribes,” Critchlow writes. “However, the populist forces unleashed by the Arab Spring uprisings of 2010 and the rise of extremists under the banner of either the Muslim Brotherhood in Egypt, or the Islamic State of Iraq and the Levant (Isil) now threaten to tear it apart.” If it does rupture, it could add still more instability to global oil markets, which already have to contend with the influence of ISIS/ISIL and Russia’s dangerous ambitions in Ukraine. That would almost certainly be bullish for Brent crude and the shares of Alberta companies like Bankers Petroleum (TSE:BNK), Vermilion Energy (TSE:VET) and Parex Resources (TSE:PXT) that produce and sell it.

Meanwhile, on yesterday’s Market Call, StoneCastle Investment Management’s Bruce Campbell (the one without the mustache) highlighted two small-cap Alberta companies as names he’d put money into right now. One of them is Pine Cliff Energy (TSXV:PNE), George Fink’s attempt to do with gas what he did with oil at Bonterra Energy (TSE:BNE). “Originally with Bonterra they did it with oil, and now they’re doing it with dry natural gas,” Campbell said. “They’ve made a number of acquisitions just in the last little while. These acquisitions have been cash flow positive and they’ve been done at valuations that really were fairly inexpensive if you compare them to the rest of the oil patch.”

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The upside, he said, could be huge. The street’s 12 month consensus target price is $2.40, a 20 per cent premium to where its shares are trading today. Campbell thinks that’s reasonable – for now. “I don’t think it’s out of line in the short term. I think in the longer term it’s way out of line, and I think the stock could go much higher.” How much higher? As he pointed out, $20,000 invested in Bonterra in 1998 is worth $9 million today. “They’ll do the same thing with this, but with natural gas. That $2.40 could be $5.40 in a couple of years.”

He also highlighted Petrowest (TSE:PRW), a service company that’s in the heart of both the buildout of LNG in British Columbia and Alberta and, if it’s approved, the Site C dam on the Peace River. The company’s already working more or less at fully capacity right now, he said, and it just did a capital raise – fully subscribed, and at the market closing price, no less – that will fund two recent acquisitions. But if Site C is approved, something that may happen within the next calendar year, the company’s business would double. Yes, double.

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