It's unnerving when stocks fall for no apparent reason. But in the case of Canada's energy exploration and production (E&P) companies, while fundamentals can vary from firm to firm, all are ultimately dependent on the prices the market dictates for the commodities they produce.
Accordingly, the recent performance of their stocks has largely mirrored the declines in oil and natural gas. Most of the E&Ps we hold in the Canadian Edge Aggressive Portfolio hit their 52-week highs in late June and have fallen an average of 14.7 percent since then.
Assuming an eventual rebound in energy prices, that gives investors who don't already own these securities the opportunity to establish new positions while they still trade at compelling valuations.
Almost as important, these stocks aren't just growth plays: The six buy-rated E&Ps that we hold currently yield an average of nearly 5 percent.
Most of these Portfolio names hit their 52-week highs on June 16. So let's use that date as the starting point to measure the performance of various energy commodities since then.
Over the ensuing period, Brent Crude, the global benchmark for oil prices, has fallen 13.6 percent, the North American benchmark West Texas Intermediate (WTI) crude dropped nearly 13 percent, and natural gas is down 16.9 percent (all based on pricing for the generic front-month contract according to Bloomberg).
Interestingly, Western Canada Select (WCS), which is the benchmark price for the heavier grade of crude produced from Canada's oil sands, has only fallen by 8.5 percent over that same period.
WCS typically trades at a discount to WTI, but lately that differential has been narrowing, from a high of USD42.00 last November to a low of USD12.95 earlier this week.
According to analysts with National Bank Financial (NBF), prices for WCS held up better than other benchmarks due to improved access to key markets where there had formerly been bottlenecks, investment in several oil sands maintenance projects, and further weakness in the Canadian dollar.
NBF believes prices for WCS will likely average CAD87 per barrel in 2014, up 13 percent year over year.
Baytex Energy Corp (TSX: BTE, NYSE: BTE) is among the heavy crude-oriented E&Ps to which the firm recommends increased exposure.
Although Baytex has risen 9.8 percent over the trailing 12-month period, the stock is down about 14 percent from its mid-June high. Nevertheless, analyst sentiment remains firmly bullish, at 18 "buys," three "holds," and one "sell."
The consensus 12-month target price is CAD53.13, which suggests potential appreciation of 22.6 percent above the current share price.
Analysts forecast full-year 2014 revenue will jump 36 percent, to CAD1.9 billion, while adjusted earnings per share are projected to surge 110 percent.
The CAD7.2 billion company's CAD2.5 billion acquisition of Aurora Oil & Gas Ltd in June gives the company a premier position in Texas' Eagle Ford Formation, one of the most prolific US shale plays.
Baytex pays a monthly dividend of CAD0.24, or CAD2.88 annualized, for a forward yield of 6.6 percent. The company has grown its payout 6.7 percent annually over the past five years.
Meanwhile, analysts with Bank of Montreal (BMO) believe downward pressure on E&P share prices offers a buying opportunity for high-quality companies such as Vermilion Energy Inc (TSX: VET, NYSE: VET).
Although Vermilion's shares have risen 21.6 percent over the trailing 12-month period, the stock has fallen 14.6 percent since its 52-week high in June. But like Baytex, Vermilion continues to enjoy largely bullish sentiment from analysts, with 13 "buys," eight "holds," and one "sell."
The consensus 12-month target price is CAD79.13, which suggests potential appreciation of 18.5 percent above the current share price.
Analysts forecast full-year 2014 revenue will jump 24 percent year over year, to CAD1.5 billion, while cash flow per share is projected to rise 15 percent, to CAD8.04.
Thanks to strong production that exceeded analyst estimates during the second quarter, Vermilion boosted its full-year production guidance by an average of 500 barrels per day, to a range of 48,500 barrels of oil equivalent per day (BOE/D) to 49,500 BOE/D from the previous range of 48,000 BOE/D to 49,000 BOE/D. That's the third consecutive increase since the company began offering such guidance last November.
Bloomberg reports that Vermilion is set to be flush with cash from its 19 percent stake in a gas project offshore Ireland, the cash flows from which it will then redeploy to acquire assets, with a particular focus on those situated in Alberta and Saskatchewan, as well as possibly raise its dividend, reduce leverage, and invest in existing projects.
According to the news service, CEO Anthony Marino says the firm's stake in Royal Dutch Shell Plc's Corrib gas project will boost annualized free cash flow by CAD3 per share when it commences production in mid-2015.
Though domiciled in Canada, Vermilion is France's top oil producer, and the firm generates the vast majority of its revenue from overseas operations, which accounted for nearly 72 percent of 2013 sales.
So in terms of pricing for the commodities it produces, the performance of Brent North Sea Crude is a more relevant benchmark for its operations than WCS, or even WTI. Although Brent crude has declined in recent months, analysts forecast the price of the energy commodity will range between USD104 per barrel to USD107 per barrel through 2015, up from the recent spot price of USD97.70 per barrel.
Analysts with GMP Securities believe Vermilion is one of the best run E&Ps in Canada, while analysts with AltaCorp Capital believe the company's future "looks as promising as ever" for investors seeking both growth and income.
Vermilion pays a CAD0.215 monthly dividend, or CAD2.58 annually, for a forward yield of 3.9 percent. The company has grown its payout by 3.4 percent annually over the past three years.
This article originally appeared in the Maple Leaf Memo column. Never miss an issue. Sign up to receive Maple Leaf Memo by email.
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