Canadian exploration and production companies have not rebounded from the sharp sell-off that took place in the oil patch after the OPEC+ fallout in March and the almost simultaneous advent of the coronavirus. Immediately oil prices began to crater, dragging down oil equities in lock-step with them.
In April, when the Saudis and the Russians announced an agreement to cut production, oil prices bottomed and began to rebound. At the same time, it seemed that the coronavirus would not be as deadly as some had initially feared, giving oil futures a secondary boost. Production cuts by U.S. producers also helped to shore up prices from late-April. Then, as prices rose, U.S. production began to fall off a cliff.
Although they remain depressed year over year, U.S. companies have seen a sharp rebound in share prices generally with large independent shale drillers, like Parsley Energy, (NYSE:PE) and Range Resource, (NYSE:RRC), tripling or quadrupling in value from March lows. While they may still have further to run as oil prices rise, gains like we’ve seen over the past couple of months are not likely.
In this article we will take a look at several key Canadian Exploration and Production (E&P’s) companies to look for investment opportunities in the Canadian North.
The thesis for buying Canadian energy companies now
It is fairly short and sweet. It is no secret, as shown in the EIA numbers graphed above, that U.S. production is falling off a cliff. I discussed this earlier this month in an OilPrice article where I detailed why U.S. production was going to falter and decline. Essentially, new drilling at all-time lows is not sufficient to outpace the decline rate of older wells.
This means there is going to be a big gap between supply and demand, assuming the global economic recovery continues. It is happening now, and will become more evident as the year rolls on. Oil is going to be in demand, at the very time we will be needing it most.
Enter Canada. Just above our border with good access to takeaway pipelines is plenty of the oil our refiners in the East, and on the Gulf Coast need for blending.
Some key points about Canadian E&P companies.
Many of the Canadian barrels, from steam floods in Alberta to Co2 injection in Saskatchewan, can be considered "advantaged." Meaning that the processing infrastructure is there to develop reserves.
Additionally, much of this oil and gas comes from conventional (sandstone reservoirs) that flow naturally. Fracking in Canada was never as big proportionately as the U.S., although areas like the Montney gas shale certainly require a good frack to flow.
Capital discipline is old news in Canada. They never really had the cheap money drilling boom we OD'd on here in the states. Companies are much more used to drilling capex from OCF than shale frackers in the states.
Political risk is smaller in Canadian companies as although the environment is not exactly friendly, no one in that country is talking about banning fracking.
This brings me to another, and final point here. Drilling is picking up in Canada! Baker Hughes noted a 7-rig increase Week over Week. That speaks volumes by itself.
Some Canadian E&P’s that have caught our attention
Baytex Energy-(NYSE:BTE)
In a rising price environment these guys might just become a dollar stock again. On the good side they have a steady source of cash flow from their Marathon joint venture in the Eagle Ford, (MRO), and refinanced a big chunk of their massive debt just in time before Covid-19 hit, so there are no near-term maturities that could tank them. On the downside, they have long term debt of over $2 bn, which dwarfs their capitalization, and will eventually have to be repaid. I like BTE for growth. At their current price of $0.58 per share, down from $1.51 in February, they represent a largely derisked play. One point worth mentioning is at their current price they are in violation of NYSE rules about minimum share prices. If they don’t rebound within a specified time period, they are subject to delisting on this exchange.
Whitecap Resources, (OTCPK: SPGYF)
Whitecap is a diversified player with toe in all forms of oil and gas E&P in Western Alberta province and Saskatchewan. Their production is skewed slightly toward oil. With proved reserves of ~500 mm BOE the company's 2-P reserves value would give it a gross valuation of $12.5 bn US. On an EV/2-P multiple of 6, Whitecap looks cheap at its current price. Analysts are high on the company as well. From my perspective the stock has run up 25% in a week, I don't see a rush to jump at current levels, and would wait for a pullback.
Crescent Point, (NYSE:CPG)
A quick review of the analyst call for Q-2 left me impressed. No near term debt maturities, paid down nearly $2 bn of debt in the past two-years. Liquidity of $2.4 bn. Its capital program is funded from cash flow. 65% of current liquids production +/- 120K BOEPD, is hedged at $48 USD. What's not to like? With netbacks near $18, CPG is outperforming many of its peers. With AFF of $109 mm for the quarter, the company presents a P/CF of 5, fairly low, and suggesting its $1.98 U.S. share price isn't over-valued. But, as with Whitecap, it’s up 25% in a week. I'd wait for a pullback.
PEYTO Exploration and Development (OTCPK: PEYUF)
PEYTO is gassy with stacked plays in some areas, with only about 20% of its reserves in liquids. Stating the obvious, this gives them a similar horizon scenario to the Permian, as shown below. PEYTO sees opportunity in sending gas south to the U.S., and the recent upward bump in gas prices supports that notion. Particularly as they own and operate a midstream entity. They are also looking east to LNG Canada for export. I've discussed that project previously. I have had my doubts about it, but haven't checked recently.
With cash flow from operations at a run rate of ~$150 mm we come up with P/CF multiple of <1 for this producer. Debt is a bit of hickey for PEYTO having had to reduce their credit line from $1.3 bn to $0.95 bn, with about $750 mm already drawn. Cash burn of $180 mm annually in capex, plus SG&A could create trouble in a year or two.
Your takeaway
I think the thesis is sound for Canadian E&P companies. U.S. production is dropping, and they are ready to supply without the cash constraints with which American shale producers are saddled.
All the companies listed have enough liquidity to survive the next few quarters, to time for the increased prices to put cash in their coffers.
To make money we sometimes have to look beyond our borders and take note of the macro-environment affecting markets. If you are comfortable investing in microcap securities, like the ones mentioned, I think the market is moving in a direction that will show favor on them.
By David Messler for Oilprice.com
