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TORONTO (GlobeinvestorGOLD)óWith current oil and natural gas prices hovering near multi-year highs, these are very profitable times for the oil and gas industry. And while history has demonstrated that nothing lasts forever, there are still some good bets to be made in the sector whether a peak in oil prices is at hand or not.
Buying low and selling high is the goal of every investor. The challenge in executing this strategy is largely one of timing and this is especially true when investing in commodity-based cyclicals such as oil and gas companies. Historically, high oil and gas prices lead to increased drilling activity, which in turn brings on new supply and, subsequently, lower commodity prices.
With current oil prices around $30 (all commodity prices in U.S. dollars) per barrel and natural gas prices of about $5 per thousand cubic feet, historically strong prices, it is prudent to assume that the stock market is already reflecting this added return in current stock prices.
The risk going forward is that we could be close to a peak in the cycle with a trough not far off. There are a handful of potentially successful multi-cycle growth stocks in the sector, however. The following picks reflect companies with special situations that should still have significant upside with less correlation to a reversal in oil and gas prices.
Western Oil Sands has a 20 per cent interest in the Athabasca Oil Sands project operated by Shell Canada and is currently trading close to our net asset value calculation of $25. This fully integrated producer of light synthetic crude oil should be operational in the first quarter of 2003. Given current commodity prices, strong initial cash flows will increase the company's financial strength as it plans to expand a further 35 per cent by 2006. In addition, production is expected to double again by 2010. The company's share price, like many others suffered during the Kyoto debate this fall. With ratification of the act, the initial uncertainty has subsided and the emissions costs now appear reasonable. There are technical risks with the startup of the project but we feel the long life and growth profile of the company outweigh these near-term factors. This is a unique asset in the hands of a strong and capable management team.
Resolute Energy Inc. is a junior oil and gas producer with balanced production. The company is in the midst of a turnaround headed by Barry Jackson and Brian Lemke, previously of Crestar Energy. The new management has brought fresh capital and ideas to 200,000 undeveloped acres throughout Alberta, which were previously held by Equatorial Energy. The shares trade for less than our $2.50 net asset value, however this is a "show me" stock. The new team arrived in July 2002 and so far most of the work has focused on property assessments and gearing up for this winter's drilling season. Management will have to show production volume growth before the stock will go up. However, all the pieces are in place for 2003 to be the year of recovery. One important yardstick will be the sale of 2,000 barrels per day of production in Indonesia, after which the company will be viewed more favorably as a pure Western Canadian producer.
Impact Energy Inc. is a junior oil and gas producer and explorer with an emphasis on exploring. The company is about 85-per-cent weighted toward gas production. The management team and properties were a spinout from ARC Energy Trust's acquisition of Startech Energy in December 2000. The entire team is dedicated to drilling deeper exploration wells in search of bigger reservoirs with a bias toward natural gas. The results of this strategy will tend to vary. The company has already had success with its Whiskey Creek and Laprise properties. This year-end's reported net asset value should be about $1.70 per share, which is close to the price at which the shares are currently trading. The company is debt free and has numerous exploration targets to drill this winter, any one of which could add significantly to the reserve base. We would like to emphasize that this is a high-risk investment due to the company's small size and exploration focus. However, some risk is reduced by Impact's diversification of properties.
Sentry Select Capital Corp. holds the above stocks in some of its portfolios
Glenn MacNeill is Vice President of Investments for Sentry Select Capital Corp.