The small Canadian energy stock and the big U.S. fund
When a large U.S. mutual fund makes room for a relatively small Canadian energy stock, it gets the attention of a leading U.S. advisory.
As any red-blooded Canadian will acknowledge, American approval isn’t necessary for success.
But sometimes it helps. When a large U.S. fund buys a relatively small Canadian stock, it’s worth an extra look.
It certainly caught the attention of a leading U.S. advisory. In fact The Complete Investor has a Fund Finds Portfolio filled with intriguing stocks that have been bought by major mutual funds.
The latest entry in that portfolio is Ensign Energy Services (TSX-ESI; OTC-ESVIF) of Calgary, which got a passing mention when we last visited this advisory (see Daily Buy-Sell Adviser, March 23).
This drilling and oilfield services firm is now firmly ensconced in the portfolio of a large U.S. mutual fund with an imposing track record.
This is not the only Canadian stock that has turned up in the Fund Finds Portfolio. There are two others we’ll tell you about as well.
A stellar record
Ensign resides among the holdings of five-star rated Fairholme Fund (FAIRK). As a U.S. mutual fund, it will not be of special interest to Canadian investors, but its performance tells us something.
It began life in 1999. Since then it is the top percentile of U.S. funds for three-, five- and 10-year returns, “a stellar record,” says Mr. Kuen Chan, writing for the advisory.
A fund that is so consistently successful must be doing a pretty good job picking stocks for its portfolio. But there’s an even more interesting aspect to its selection of Ensign Energy.
This fund’s holdings are largely made up of financial and health care stocks. Only 2.5 per cent of its assets are devoted to energy — and almost all of that is devoted to Ensign. What’s more, Ensign “is one of the fund’s most heavily held stocks.”
And this despite the fact that it is a relatively small firm with a market cap of $2.2 billion.
Of course, any benefit shareholders might have gained from a spike in the price when Fairholme bought its block of shares has already come and gone. But let’s see what the fund sees in Ensign.
Advanced rigs
Ensign draws three quarters of its revenues from Canada and the U.S., says Mr. Chan, but it has operations in 10 other countries as well.
“The company stands out for its technologically advanced and environmentally friendly rigs,” he adds, “which should give it an edge as producers attempt to wrest oil and gas from ever more challenging deposits.”
Ensign's latest generation of rigs, automated drill rigs (ADRs) can be set up and moved far faster than conventional rigs. They are safer and more cost-effective. It now has over 60 of these rigs in action. In all, Ensign has 300 working drilling rigs and over 130 specialized rigs.
2009 was not a great year for Ensign. Rigs sat idle while energy prices remained low. Total drilling days and earnings dropped together.
Now it’s time for a turnaround, says the author.
Getting busy again
As oil and gas prices recover, the world’s rigs are getting busy again. Ensign is being cautious for the immediate future, especially here in Canada. With warmer weather come thaws that often mean the terrain can’t support heavy drilling equipment.
But the company has an advantage in the U.S., where its long-term contracts mean it doesn’t have to rely on spot prices, says Mr. Chan. The rush to exploit shale deposits has also raised the demand for its rigs.
There should also be improvement overseas in locations such as Venezuela and Libya. Ensign’s international sales grew by 20 per cent in the good years of 2006 to 2008 and are due to get back on track.
Late in 2009 Ensign purchased private firm FE Holdings, gaining six rigs and “an established market presence” in Mexico, where land drilling is about to rise significantly, says the author.
Ensign has no long-term debt and more than $40 million in cash. Given its strong balance sheet, sound management and advanced rigs, this advisory expects it to generate double-digit growth “for at least several years,” concludes Mr. Chan.
Ensign has been moving up and trades at $15.05 today. It also yields 2.3 per cent on its $0.35 dividend.
As promised, we have a couple of other Canadian stocks in the Fund Finds Portfolio. One is gold royalty company Franco-Nevada Mining (TSX-FNV; OTC-FNNVF). It is held by a large Fidelity fund and is trading today at $27.44 and yielding just over 1 per cent on the $0.28 dividend.
Pan-American Silver (TSX-PAA; NASDQ-PAAS) is held in a fund that specializes in low priced stocks. It trades at $24.65 and yields 0.2 per cent on its small dividend of $0.05.
A vote of confidence from the U.S. is no guarantee of success for a Canadian stock. But it does mean that many more investors are banking on that success.
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