Thu 4 Dec 2008
Canadian energy companies are in generally good financial shape, but they have become more conservative with their balance sheets and have cut back on capital spending, says growth manager and energy specialist Greg Bay, president of Vancouver-based Cypress Capital Management Ltd.
Their cash flows have declined in the face of the sharp fall in commodity prices, he notes, and companies are now spending within their cash flow constraints, rather than seeking external financing as the credit and equity markets are expensive.
A number of oil patch companies have reduced their capital expenditures and few are committing to major new projects, he says, which, given the decline rates in oil and natural gas fields, means a reduction in supply from Canadian producers. Companies in other oil-producing countries are cutting back too, he says. Also, OPEC might move to reduce supply.
On the demand side of the equation, there is demand destruction in the United States and elsewhere in the face of the weakening global economy.
“It may take a while for this to recover, the monetary and fiscal stimulus is underway globally, but it takes time for this to work through the system.”
Given this environment, Bay considers that the valuation parameters on energy producers may have changed.
“In the boom times, quality energy companies traded at five to six times forward cash flow per share estimates. Now this is more likely to be in the three to four times cash flow per share multiple range.”
There are, he says, even some companies that are now trading at two times cash flow per share.
Those energy companies with financial strength are in a position to take advantage of the weak valuations of their smaller counterparts and make strategic acquisitions.
“An improvement in the capital markets could set off a wave of consolidation.”
Cypress Capital has a wide range of mandates for both private and institutional clients. These include two pooled funds — the Cypress Canadian Equity Fund and the Cypress Small Cap Growth Fund.
Other funds managed include EnerVest Diversified Income Trust, EnerVest Natural Resources Fund and EnerVest Energy and Oil Sands Total Return Trust.
In managing oil and gas holdings across a wide range of portfolios, Bay has been emphasizing large-and medium-cap energy companies and more senior energy services companies. The energy juniors are, he says, having a tough time financing their projects. In light of this, Bay has been reducing his exposure to this segment of the energy sector.
Of the energy services companies, Bay notes: “Their prospects are driven by the amount of drilling and the weaker players will come under pressure.”
But those companies with exposure to high drilling areas, such as the Bakken trend and the Montney play, will still enjoy strong demand for their services.
Bay reports that he has been adding to some key energy holdings of late. For example, in the Cypress Canadian Equity Fund, he has been adding three major Canadian producers:
- Nexen Inc. (NXY/TSX). This Calgary-based company explores for and produces oil and gas on a worldwide basis including Canada, the North Sea and the U. S. Gulf Coast.
Its oil sands interests consist of a 7.23% joint venture interest in Syncrude Canada Ltd. It also has a 50% stake in the Long Lake project (OPTI Canada Inc. has the other 50%) in the Athabasca region of Alberta. The Long Lake project uses steam-assisted gravity drainage and proprietary OroCrude technology for phase one.
This company, which has a strong balance sheet and cash holdings, is subject to frequent speculation about possible takeovers. The stock rose significantly last week on such rumours.
“Nexen has good assets and is a highly regarded company.”
Bay’s cash flow per share estimate is $7.80 for 2008 and $7.00 for 2009.
- Canadian Natural Resources Ltd. (CNQ/TSX). This Calgary-based company’s core regions of operations are in Western Canada, the United Kingdom sector of the North Sea and offshore West Africa.
In Canada, it holds oil sands leases in Northern Alberta, where the Horizon project (100% working interest), 70 km north of Fort McMurray, is being developed in phases.
Phase one is coming on stream and “production should ramp up significantly next year and substantially boost the company’s cash flow and bolster its balance sheet.”
The cash flow per share estimate is $13 for 2009 and $12.75 for 2010.
- EnCana Corp. (ECA/TSX).
This Calgary-based senior energy company, which produces natural gas in Canada and the United States, is one of the lowest-cost producers of natural gas in North America, he says.
The company has shelved its previously announced initiative to separate the natural gas activities from its oil sands interest in two separate companies on account of the credit crunch, but could revisit this at some stage.
The stock represents “excellent value at this stage.”
Bay’s cash flow per share estimate is $13 for 2008 and $12 for 2009.
He has also added to:
- Highpine Oil & Gas Ltd. (HPX/TSX), which is a mid-sized company. Calgary-based High-pine explores for and develops oil and gas in western Canada with several properties in the Pembina/Nisku areas of Alberta, an important area in the Western Sedimentary Basin.
The company, says Bay, has a strong balance sheet and is generating good production growth. Bay’s cash flow per share estimate is $5 for 2008 and $2.10 for 2009.
A smaller energy producer that meets his criteria that he has added to:
- Breaker Energy Ltd. (WAV/ TSX). This Calgary-based energy producer explores for oil and gas in western Canada. Its interests include Girouxville and East Prairie in west-central Alberta and Provost, Medicine Hat and Irricana in southern Alberta. Outside of Alberta, its interests are Domremy in Saskatchewan and Fireweed in British Columbia.
Breaker currently has roughly 50% of its total production in oil and 50% in natural gas. Bay’s cash flow per share estimate is $2.65 for 2008 and $2.00 for 2009.
shorvitch@nationalpost.com———
SPOTLIGHT
NEXEN INC.
Ticker NXY/TSX Close$21.65, down $2.61 52-week range $43.45-$13.33
CANADIAN NATURAL RESOURCES LTD. Ticker CNQ/TSX Close $47.37, up 12¢ 52-week range $111.30-$34.19
ENCANA CORP. Ticker ECA/TSX Close $52.88, down $1.06 52-week range $101.00-$41.36
HIGHPINE OIL&GAS LTD. Ticker HPX/TSX Close $5.06, down 23¢ 52-week range $14.69-$4.33
BREAKER ENERGY LTD.
Ticker WAV/TSX Close $5.15, down 25¢ 52-week range $13.05-$3.65
