Canadian mid-cap exploration and production companies are having one of their strongest years on record, with shares in many names doubling. But one company that has been lagging is Surge Energy Inc (SGY-T), despite a significant improvement in industry fundamentals.
Raymond James analyst Jeremy McCrea believes that’s about to change, and has raised his price target considerably to C$10.50 from C$1.25. He has an “outperform” rating on the stock. The stock was trading Thursday morning near $4.30.
There are a few reasons that he cited for this optimism, and some are somewhat unusual. One is that institutional investors have been looking up the stock more often on the Bloomberg terminal - a potential sign that many are considering purchasing the stock. Surge now ranks as the 15th most searched Canadian exploration and production company on the terminal, and 216th of TSX listed stocks, despite a market cap of only about $300 million. “Its ranking has also improved from 640th at the beginning of Q2, showing one of the largest increases in interest by investors, especially in the last couple of weeks,” he noted.
Meanwhile, he believes part of the reason for the share price lagging is the lack of new and existing shareholders buying in the second quarter. “Looking more closely at the ‘6 sellers’ of 2.3 mln shares, this was all from one Account (that controls six underlying funds). This Account is based out of Austin and uses a quant style of investing (i.e., doesn’t meet management or dealers) and is algorithmically driven. As such, we find these types of funds will miss fundamental step-changes before they occur. Ultimately, with investors showing renewed interest in SGY as it related to the Bloomberg sentiment but still no reported institutional buying in Q2, it seems the set-up is looking quite attractive in terms of new buying,” Mr. McCrea said in a report to clients.
Meanwhile, Mr. McCrea notes that one of the most important factors in a successful E&P company is return on capital. “High leverage, or steep declines can all be managed if field operations show high return metrics. In the current pricing environment, many companies are seeing quick payouts under 12 months and of the 90+ plays we cover within the sector, there’s not much differentiation between companies today on this metric,” he said.