Oil Weighted Firms Predicted To Outperform Gas Producers In 2012; Top Stocks Reviewed By The Senior Energy Analyst At AltaCorp Capital Inc.
January 11, 2012 - The Wall Street Transcript has just published Oil & Gas: Refining, Independent and Major Integrated Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Jeremy McCrea, CFA, joined AltaCorp Capital Inc. to cover junior and midcap domestic E&P companies. Before AltaCorp, he spent the past three years in equity research at National Bank Financial, and previously, he was an investment banking Associate for three years at Mackie Research Capital Corporation, raising more than 400 million in net capital. Mr. McCrea has a bachelor of commerce from the University of Calgary.
TWST: Would you begin with a brief overview of your coverage, including some of the specific names you follow?
Mr. McCrea: My coverage list includes small- to mid-cap E And P names. The names that I'm currently covering are Bonavista (BNP.TO), Bonterra (BNE.TO), Bellatrix (BXE.TO), Daylight (DAY.TO), Fairborne (FEL.TO), Renegade (RPL.V), Pace (PCE.TO) and Yangarra (YGR.V) currently right now.
TWST: In your recent report on Bonavista, you wrote the company has been "a safe haven for investors." What are the characteristics of that company and of the stock that make it a safe haven, and which other companies in your group share those characteristics, if any?
Mr. McCrea: The unique thing with Bonavista, it's a yield name, and given the current turmoil, investors tend to flock to the tried and tested management teams that have been through the ups and downs many times before. And these typically tend to be yield names where the management has a strong and long track record. In Bonavista's case, this management team is very highly regarded. They have a solid track record over the past 10 years of consistently showing solid production and cash flow growth. When they say they are going to grow production and cash flow 10% a year, the market believes them. And if it's a little less this year, they'll make it up next year.
And for that reason, I think there's lot more comfort going to these type names right now versus the junior names, where the management teams aren't as well known, and where the growth just may not be there in a declining commodity environment. For a lot of the junior names, they rely on the capital markets to raise funds, and if these markets aren't there, it adds a lot more undue risk, especially for overlevered names that might not make it through a prolonged downturn. And you can see that in the valuations reflected that we've talked about before, the yield names are trading at premium versus everyone else who are trading at discounts.
TWST: What are the other names in your group you would put in that "safe haven" category at this point?
Mr. McCrea: I would put Bonterra in that category right now too. Once again, solid management team, pays a nice yield, strong balance sheet and some great rates of return on its assets.
TWST: Out of all of the companies you cover, would you give us two examples of stocks that you believe are ideal ways to get exposure to oil and gas, specifically at this point in time?
Mr. McCrea: One of the most exciting names in my coverage list right now is Bellatrix, ticker is BXE. This is a 15,000 BOE/D producer, about 55% gas with one core field at Pembina, chasing Cardium oil, Notikewin gas with significant Duvernay optionality. Although the Cardium has given mixed results to a lot of players out there, I think Bellatrix has been somewhat grouped with them, but looking at the individual well results, Bellatrix is actually getting almost twice the I.P. rates of what their competitors are getting. The key reason is they are actually in a region where the underlying rock has all been naturally fractured, all the way to the basement, and for that reason, this is what's giving them a lot better I.P. rates than a lot of their competitors.
So going forward, when I look at their growth, these higher rate of return wells now are actually giving them the ability to grow their cash flow per share about 50% over the last couple of years and going forward into 2012, we expect them to grow almost 50% as well next year, too. When I look at its relative peers, names that are producing above 10,000 BOE/D, there are only five names in the entire intermediate universe that are growing their CFPS above 50%, and that's Bellatrix, Celtic, Paramount, Trilogy and Tourmaline. And each one of these names is all trading at 11.5 times EV/DACF, except for Bellatrix, that is only trading at 5.0 times EV/DACF.
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