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Energy specialist Greg Bay, president of Vancouver-based Cypress Capital Corp., is focusing on bigger-cap Canadian companies with the flexibility to grow their production outside Alberta.
Oilsands projects, particularly those at earlier stages, have been relatively unscathed by Alberta's planned royalty structure, he says. "These long-life assets continue to attract international investor attention."
Oil and gas trusts will also be less affected by the royalty as many of them have older, mature wells.
But the royalty will reduce the cash flows of many Alberta producers, particularly those with high-productivity oil wells, says Bay.
Along with this blow, the Canadian energy sector has had to weather a number of other negatives that have dampened the benefit of the high oil price in U.S.-dollar terms, he says. The weaker U.S. dollar means the oil price is less impressive in Canadian-dollar terms, he adds.
Also, the North American natural-gas price remains weak. Then, even though industry costs have peaked and have started to decline, it will take time for this to work its way to the companies' bottom line.
In all, this has dampened investor enthusiasm for energy stocks, he says. "It is a capital-intensive industry that needs regular equity infusions from the financial markets to grow production."
Cypress Capital, with assets of about $5-billion, has a wide range of mandates for both institutional and private clients. Bay looks for companies that can grow their earnings or cash flow per share.
Of the energy juniors, Bay notes that these stocks have come under substantial selling pressure. Many of these stocks are now trading at one-half to three-quarters of the net asset value per share of the companies, he notes. "It will be survival of the fittest; expect to see further consolidation in this segment with well-managed, well-capitalized companies buying their weaker counterparts."
To Bay, it is still too early to buy energy-services stocks, even though the valuations are attractive.
"Clearly those companies focused on maintenance are doing better than the drillers as drilling is down significantly." There will also be consolidation among the service companies, with the players with strong balance sheets buying their weaker counterparts.
Among the firm's largest energy holdings are three senior producers that have the characteristics that Bay has outlined: - Canadian Natural Resources Ltd. The company, says Bay, has already announced that it is cutting spending in Alberta and is putting more emphasis on B.C. and Saskatchewan. On the oilsands front, CNQ has announced that it is rethinking its strategy on the development of its substantial Horizon project to better control costs, says Bay.
"In all, its production will decline next year."
The cash flow per share estimate is $11 for 2007 and $9.09 for 2008. - Nexen Inc. Bay has been adding to his holding in this stock. The company produces oil, gas and related products from Canada and Yemen, in the U.S. Gulf of Mexico and the U.K. North Sea, West Africa and Colombia.
Its oilsands operations consist of its 7.23% joint-venture interest in Syncrude Canada Ltd. The cash-flow-per-share estimate is $5.84 for 2007 and $6.29 for 2008. - Talisman Energy Inc., which has interests in Canada, the North Sea, Southeast Asia, Australia and North Africa.
New CEO John Manzoni, who replaced Jim Buckee, "will need to show the Street that he can continue to grow this company," Bay says. The cash-flow-per-share estimate is $3.97 for 2007 and $4.31 for 2008.
Turning to the integrated energy companies, one of his largest holdings is Suncor Energy Inc., which is largely focused on developing the Athabasca oilsands in Northern Alberta. The cash-flow-per-share estimate is $7.74 for 2007 and $9.55 for 2008.
Two oil and gas royalty trusts that meet Bay's criteria that he is highlighting: - Crescent Point Energy Trust. This Calgary-based trust explores for and produces oil in Western Canada.
"Its main interests are in Saskatchewan." Its estimated distribution per unit is $2.40 for 2007 and for 2008. - Vermilion Energy Trust. "This trust has substantial international operations," Bay says. Through its wholly owned subsidiaries and affiliates, this Calgary-based trust explores for, develops and produces oil and gas in Alberta, the Aquitaine basin in France, Netherlands and Australia. The estimated distribution per unit is $2.04 for 2007 and for 2008.
Bay sold his holding in Cork Exploration Inc. in the fall, prior to the announced reverse takeover by Profound Energy Ltd., a then private Alberta-based natural-gas exploration company.
"Cork's stock sold off after this announcement as this transaction did not meet the market's expectations," he says. (The combined company has continued under the name Profound Energy Inc.)
shorvitch@nationalpost.com
