Oil and gas stocks in Canada for Q3 2016
Industry overview and what companies to keep tabs on
“The volatility of oil prices means that it is still virtually impossible for buyers and sellers to agree on what assets are worth, which means that acquisition and equity markets will likely remain subdued in the near future.” – Tom Pavic, President, Sayer Energy Advisers
Oil and gas, Canada’s lifeblood. It is an industry near and dear to our heart, and one that provides plenty of highs and lows for our economy. The scope of the industry is huge, consisting of the multi-nationals, the large caps, mid caps, small caps as well as the energy service providers. In this article, we will provide some insight for the current quarter and provide a few picks of oil stocks to watch out for as we head into the tail end of the year. This space is competitive, and is subject to so many external influences and organizations (ahem, OPEC…we are looking at you!). Apart from the economics behind supply and demand, we are also in an age of developing renewable technologies, as well as advancing oil and natural gas extraction technologies, this all makes for a complicated, but inherently fascinating industry.
The oil and gas industry in Canada for Q3 2016, what has happened, and what is the forward outlook for oil stocks?
With an unprecedented drop in oil prices to kick off the volatile year that is 2016, the majority of Canadian oil and gas firms took a major hit and winded down production. From a global standpoint, this was a result of OPEC squeezing out other countries, and to a large degree it worked. WTI Crude has somewhat stabilized and is now trading in the 40-50$ range, however for most parts of Canadian production, oil sands is the name of the game, and since this costs more to produce, we are a far ways from a full recovery.
Given that the Canadian dollar is a petro-currency, this has not helped those wanting to go across the border, however, the recovery from that 1.50 range to the 1.30 range is at least some form of compromise. Of course, most companies have been hedged against the drop in prices, but the effect was still huge.
Q2 success for the oil and gas industry
Q2 earnings reports as a whole have been somewhat strong, providing a sense of optimism in oil stocks, with companies electing to increase their capital expenditure towards new projects. This has been coupled with quite a few companies raising funds for acquisitions, paying off debt, and continuing their current operations as the industry consolidates itself and the strongest survive this dark patch in their existence. Some examples of this are:
Inter Pipeline raising capital to buy William’s Alberta oil and gas assets
Seven generations energy had a $300M bought deal to be used for paying of debt and continuing operations
Weak global prices are stalling pipeline projects
A heated topic for the oil and natural gas industry in Canada however is lack of progress on new pipeline projects. This is highly showcased in the most current Shell LNG pipeline, which was supposed to be passed through Kitimat. The company announced that they were going to hold off indefinitely on building the pipeline, and cited weak global prices as the reason. This dampens the mood in Western Canada especially, but the whole of the country in general. This is compounded with the strides other countries around the world, especially the US are making in this area. The US is projected by the International Energy Agency to become the world’s third-largest liquefied natural gas supplier in five years, showing the infrastructure changes that are been held at bay for Canada.
Oil Stocks to look out for:
Now, with all this pessimism, there is hope! There are many great companies with strong balance sheets, and or diversified operations and smart plans for the future that should not be missed. Here are our top BUY picks for this quarter with an eye on recovering demand, and an industry in flux, this reflects our opinion and should not be used in place of independent research and analysis. If you don’t have a brokerage account yet to buy stocks, check out our comparison of online brokers. If you don’t even know how to buy stocks, check out our tutorial here!
Canadian Energy Services & Technology Corp (TSX:CEU)
|Company Summary||Canadian Energy Services & Technology Corp provides consumable chemical solutions throughout the life-cycle of the oilfield. Its solutions include drill-bit, at the point of completion and stimulation, at the wellhead and pump-jack, among others.|
|Market Cap MM||1045|
|Analyst Target Price||$5.50(36% Upside)|
|Outlook||CEU reported 2Q/16 EBITDA (adj.) of $2.0MM that was approximately in-line with analyst estimates. Weak Q2 results were well-understood heading into the quarter as North American activity continued to weaken at hit some of its lowest points. |
As a result of being a energy service provider, as pricing pressures, reduced well usage and closing of some operations occurred, CEU faced enormous pressure on its revenue and earnings. However as activity begins to pick up, this should be a stock that rides along the semi-resurgence in energy and petroleum spending , along with higher oil prices.
Peyto Exploration & Development (TSX:PEY)
|Company Summary||Canada-based energy company. The Company is engaged in acquisition, exploration, development and production of oil and natural gas in Western Canada. Its portfolio of assets includes exploration, exploitation and development opportunities located primarily in the Deep Basin of Alberta.|
|Market Cap MM||6,222|
|Analyst Target Price||$45.00(28% Upside)|
|Outlook||CEU reported 2Q/16 EBITDA (adj.) of Peyto's Q2/16 results were in-line and largely pre-released, with operational momentum intact. PEY has managed the downturn effectively and is well positioned to outperform in a low commodity price environment. Most analysts have maintained their positive growth forecasts, with a consensus estimate price target of $45.00.|
Peyto noted that drilling costs have fallen by ~15% (per meter) and completion costs have fallen by ~45% (per meter) compared to 2015.
Peyto ran 8 rigs during the quarter, drilling 19 wells (18 net). Production volumes decreased QoQ due to roughly 17,400 boe/d of volumes that were deferred due to very low natural gas prices. The company recently started bringing volumes back online with July volumes of 92.5 mboe/d; management continues to expect exit volumes well in excess of 100 mboe/d.
Keyera Corp (TSX:KEY)
|Company Summary||Keyera Corp. is engaged in energy midstream businesses, and operates in oil and gas sector between upstream and downstream sectors. The Company is organized into two business units: Gathering and Processing Business Unit and Liquids Business Unit. It owns and operates raw gas gathering pipelines and processing plants, which collects and processes raw natural gas, removes waste products and separates the economic components through its Gathering and Processing Business Unit. Its Liquids Business Unit includes two segments: NGL Infrastructure and Marketing. It owns and operates a network of facilities for the processing, fractionation, storage and transportation of the by-products of natural gas processing, including natural gas liquids (NGLs) through its NGL Infrastructure segment. |
|Market Cap MM||7,213|
|Analyst Target Price||$45.00(15% Upside)|
|Outlook||While there is a focus on the potential for reduced volumes in the Gathering & Processing business. The premier growth of some of Keyera’s chemical aspects in Alberta coupled with management's long track record of optimizing assets marries well with a very strong balance sheet and a low payout ratio.|
Keyera boosted its dividend by 6% , and should be able to capitalize on the short term energy space very much in the same frame of reference as CEU.
Keyera's assets are well positioned to capture increasing volumes via existing facilities, expansions of existing facilities, new facilities and higher NGL production.
Keyeras results were largely in line with analyst expectations, resulting in EBITDA of $157 million compared to estimates of around $158 million.
Transalta Renewables (TSE:RNW)
|Company Summary||TransAlta Renewables Inc. is a Canada-based company engaged in developing, owning and operating renewable power generation facilities. The Company owns and operates over 10 hydro facilities and approximately 20 wind farms in Western and Eastern Canada with a total installed capacity of approximately 1,140 megawatts (MW) and holds economic interest in approximately 140 MW Wyoming Wind Farm and approximately 420 MW Australian gas-fired generation assets, as well as over 270 kilometers gas pipeline. The Company's subsidiaries include Canadian Hydro Developers, Inc. and Western Sustainable Power Inc. |
|Market Cap MM||3,220|
|Analyst Target Price||$14.25(6.5% Upside)|
|Outlook||This stock is our wild card in this article, with all the doom and gloom around the oil industry, it might be a good idea to look at renewables. Transalta Renewables (not to be confused with Transalta Gas) is a separately owned and managed company that focuses on renewable energy. The company is structured to provide a very strong dividend to shareholders consistently. This is a good diversification aspect for your portfolio of energy securities and offers increased yield.|
The company missed on recent earnings estimate (0.04 Actual, 0.17 Expected) however in 2015, TransAlta Renewables Inc reported a dividend of 0.82 CAD, which represents a 28.19% increase over last year. Analysts covering the company expect dividends of 0.88 CAD for the upcoming fiscal year, an increase of 6.99%.
TransAlta Renewables Inc. had 2nd quarter 2016 revenues of 52.00m. This missed the 58.80m consensus estimate. This was 1.41% above the prior year's 2nd quarter results.
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