Who would have thought that oil would be trading at US$50 a barrel?
But even after a 50% drop from the peak in July, 2014, momentum in the global energy sector could continue to drive prices even lower, possibly down to US$40, says Sprott Global analyst Eric Angeli.
So does that mean investors should stand on the sidelines waiting for the recovery to kick in?
Angeli says no. “Trying to guess where the bottom lies is a fool’s game,’’ he told Stockhouse, during an interview this week.
Angeli says investors should take a long term view and consider companies with clean balance sheets, low debt, experienced management teams, and enough cash in the treasury to ride out the current slump in energy prices.
“I’m a buyer here,’’ the Sprott analyst said, adding that clients should consider taking a look at some of the following names:
Whitecap Resources Inc. (
TSX: T.WCP,
Stock Forum) ($10.38) is a dividend-paying oil-weighted company with operations in Western Canada. As a result of the drop in crude oil prices, the company said last month it will reduce its capital spending program in 2015 to $245 million, down 32% from a planned $360 million. The move aims to maintain the company’s financial flexibility.
RMP Energy Inc. (
TSX: T.RMP,
Stock Forum) ($3.99) is a junior oil and gas company with assets concentrated in west central Alberta, and average production of 11,500 barrels of energy per day. The company has said its 2015 capital budget is expected to deliver 30% year-over-year production growth from fiscal 2014.
Freehold Royalties Ltd. (
TSX: T.FRU,
Stock Forum) ($17.73) is an oil and gas company that holds a basket of royalty interests in over 30,000 wells in Western Canada. Royalty interests accounted for 73% of the company’s annual operating income in 2013.
PrairieSky Royalty Ltd. (
TSX: T.PSK,
Stock Forum) ($29.60) was spun off last year by Calgary-based
Encana Corp. (
TSX: T.ECA,
Stock Forum, which decided to separate a big chunk of its royalty lands into a new publicly traded company. PrairieSky makes money by allowing other energy companies to develop oil and gas on its land holdings, which cover 5.2 million acres in southern and central Alberta.
Toscana Energy Income Corp. (
TSX: V.TEI,
Stock Forum) ($10.07) has a mandate to invest in medium to long-life oil and natural gas assets, unitized production, and royalties for yield and capital appreciation.
The company targets non-operating working interest investments in the oil and natural gas sector with reserve life indexes of more than eight years, with the goal of generating eligible dividends in the range of 8% to 9% per annum.
Angeli says investors should also consider integrated oil and gas companies like
Chevron (
NYSE: CVX,
Stock Forum) ($107.94) and
Exxon Mobil Corp.(
NYSE: XOM,
Stock Forum) ($90.72) , which operate refineries, and are therefore benefitting from the drop in the price of oil.
These companies have benefitted as the cracking spreads have increased from $3.65 per barrel a year ago to $11.08 today, marking a 203% increase. A cracking spread is the profit margin that an oil refinery can expect to make by “cracking” crude oil, thereby breaking its long-chain hydrocarbons into useful shorter-chain petroleum products.
Petroleum & Resources Corp. (
NYSE: PEO,
Stock Forum) ($23.04) is an equity investment fund for investors who seek a broadly diversified exposure to the energy and natural resources sector, as well as consistent dividend and capital gains payouts. The majority of the fund is invested in five sub sectors, including integrated oil companies, exploration, and production, utilities, services and basic materials.
“My impression is that momentum-wise, [oil] prices have further to fall,’’ Angeli said.
His investment thesis is based on the belief that global oversupply, caused in part by the U.S. shale boom, sent oil prices plunging from a peak of $105 in July 2014 to around $85.
According to stats released by the Oil & Gas Journal, global oil supply exceeded demand by about 500,000 barrels per day in the first quarter of 2014. But it wasn’t until the oversupply figure rose to 1.3 million barrels per in the second quarter, that markets began to take notice, Angeli said
The price of oil has continued to fall even though the global oversupply figure has dropped to around 600,000 barrels per day in the third and fourth quarter.
Oil & Gas Journal said decision by the Organization of Petroleum Exporting Countries (OPEC) in November to leave its production target unchanged at 30 million barrels per day, and not to address actual output, left crude prices at the mercy of a market with supply growing faster than demand.
However, the subsequent drop to around from $95 to $50 was largely driven by trading momentum and a cascading effect that resulted in that oil stocks becoming oversold, in Angeli’s view.
“That has given traders an opportunity to take positions in high quality names,’’ he said.
Angeli is not making any forecasts in regards to where oil will trade this year.
But he said the market will be watching for a drop in drilling activity in North America.
The rig count currently stands at 1,875 in the United States and 391 in Canada.
That’s down from 1925 in the U.S. and 430 in Canada last month.
The faster we stop drilling new production, the quicker the oversupply situation will be cured, Angeli said.
“We are already seeing an increase in demand stemming from cheaper prices, a natural force in the economic laws of supply in demand.”
Also, Brian Purdy an energy sector resource analyst with PI Financial in Calgary has a buy on
High Arctic Energy Services Inc. (
TSX: T.HWO,
Stock Forum) ($3.67) which remains his top pick in the sector. Its main market is Papua New Guinea, driven by LNG projects, (not oil) and has cash on the balance sheet for acquisitions. Purdy has a buy rating on the stock, with a target of $6.50.
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