Three favourite stocks from an oil patch insider
If you’ve stuck with energy stocks, it’s a good time to look around and see who’s ready for a rebound, says this expert. Like these survivors.
“Now that wasn’t so bad.”
That’s not a dentist speaking, that’s an insider in the Alberta oil patch. He’s talking to those who did not sell in May and go away, but remained in the market.
They were rewarded with “the biggest single-month turnaround on the markets since the Leafs won the Stanley Cup.”
That was 1967, in case you weren’t aware. “And if you’re old enough to remember that,” adds our insider rather sardonically, “be glad you still have some senses, not to mention a few dollars left in your jeans.”
Our anonymous friend in the oil patch goes only by the name of Wildcat Willie and regularly sends reports to readers of Investor's Digest of Canada. He takes aim mostly at the smaller players in the business.
And now that the market has had something of a rebound (Monday’s downdraft notwithstanding), he thinks it’s time to revisit three of his “old favourites” in the industry.
Highs and lows
Willie begins his report with Highpine Oil and Gas Ltd. (TSX-HPX). This company, he tells us, has managed to stay in business more or less in its current form since 1998.
“This is a stock that has seen highs — big discoveries at Pembina — and lows, namely the Alberta government’s royalty debacle. And that’s not factoring in a major sell-off or two along the way.”
This stock sold for $15 a year ago and $25 two years before that. So why get in now when it’s selling for around $4.35?
First, you have to think things can’t get worse. For the first quarter, revenues and cash flow were down 60 and 75 per cent, respectively. That’s nothing compared to earnings. They were down 500 per cent.
But there’s a ray of light. Operating costs also fell, all the way down to a mere $10 or so a barrel. “Not too shabby,” says Willie, “even if oil goes back down to $35 a barrel.” Of course it’s about twice that now.
More important in Willie’s mind is the fact that Highpine has a good mix of oil and natural gas that “lets it shift gears as required. What don’t kill you makes you stronger and Highline has proven survival skills. That’s worth at least $5.”
Taking out a larger rival?
A smaller player in the West Pembina oil field is West Energy Ltd. (TSX-WTL).
“Where Highpine tried to get bigger, faster, West took a more disciplined approach to live within its means,” explains Willie, “not always an easy thing to do when commodity prices lose three-quarters of their value in less than a year.”
In the normally busy winter season, West spent some $9 million compared to cash flow of $8.4 million. So it has virtually no debt and a strong balance sheet with room for acquisitions.
“And after five years of growing almost exclusively by the drill bit, the time could be right for the small company to make a big move in a bid to become the next intermediate player,” says Willie.
“By taking out a larger rival like Highpine? Stay tuned.” West is trading at just over $2.00.
Its own pipeline
The third of Willie’s favourites is Orleans Energy Ltd. (TSX-OEX). It was “a Montney player before Montney became a household word.”
And in case that word isn’t commonly tossed around in your household, Montney is a formation in northeast B.C. that became a hot property in the oil and gas industry a year or so ago.
Orleans has spent several years building up the infrastructure it needs to support the potential of its assets. Now things are falling into place.
In May, the company announced the start-up of its strategic Kaybob pipeline, which should eventually ship 75 million cubic feet a day.
With its own pipeline, Orleans will save money on expensive processing fees. And it will be able to sell excess capacity to other third parties, “putting it firmly in the driver’s seat and allowing it to control both the pace and timing of its destiny,” Willie tells us.
That could add up to $2.70 a barrel in cost savings. Not bad for a small junior that barely turned out 370,000 barrels of oil equivalent a year ago.
Like everybody else in the oil patch, Orleans has been hit hard by falling commodity prices. The fact that it’s heavily weighted to natural gas hasn’t been a boon, either.
“But it’s probably safe to say that the worst is probably over even if we don’t see a full recovery for another quarter or two,” Willie says.
Orleans’ shares fell from above $5 to their current level, just above $2. But they didn’t scrape bottom and risk de-listing.
So Willie signs off to his Investor's Digest of Canada readers with this final word on the stock: “Look for good things now that the Kaybob pipeline is up and running. It only gets better from here.”
Is that going to be the prevailing trend in the oil patch? Stay tuned.
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