The long-term outlook for oil and natural gas is positive, although in the short term, shale oil and gas discoveries continue to rapidly increase supply. That’s keeping prices low—and pushing down the shares of producers.
We advise against overindulging in any one sector. However, we do think most safety-conscious investors should stick with the energy stocks we rate as buys in Canadian Wealth Advisor. Here is our latest advice on two of them.
ARC RESOURCES (Toronto symbol ARX; www.arcresources.com) produces oil and gas in western Canada. Its average daily production of 95,725 barrels of oil equivalent is weighted 61% to gas and 39% to oil.
In the three months ended December 31, 2012, ARC’s cash flow per share fell 13.9%, to $0.68 from $0.79. Production rose 4.0%, but that was offset by a 3.2% decline in gas prices.
The company’s long-term debt is $747.7 million, or a low 9.5% of its market cap. ARC trades at 11.1 times its forecast 2012 cash flow of $2.32 a share. The shares yield 4.5%.
The company aims to end 2013 with production of 100,000 barrels per day.
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ENERPLUS CORP. (Toronto symbol ERF; www.enerplus.com) produces an average of 85,490 barrels of oil equivalent per day (weighted 51% to gas and 49% to oil). Its properties are mainly in Alberta, Saskatchewan, B.C., North Dakota and Montana, as well as the Marcellus Shale, which passes through Pennsylvania, New York, Ohio and West Virginia.
In the three months ended December 31, 2012, Enerplus’s cash flow per share rose 16.1%, to $1.01 from $0.87 a year earlier. Gas prices fell 11.7%, but that was offset by a 10.7% production increase and lower operating costs.
The company’s shares now yield a very high 7.9%. Enerplus’s debt is $1.0 billion, or a manageable 37.0% of its market cap. The stock trades at 4.3 times its 2013 cash flow of $3.15 a share.
In the latest issue of Canadian Wealth Advisor, we look at the outlook for both companies. We examine the added risk of ARC’s plan to increase its exploration and development budget by almost 30% this year, and Enerplus’s plan to cut exploration and development in order to maintain its high dividend. We conclude with our clear buy-hold-sell advice on both of these stocks.
COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members
Do you think energy stocks should meet certain minimum qualifications for a solid conservative portfolio, such as a sustained record of production, or the payment of a dividend? Or do you think it’s OK to set aside a portion of your portfolio for more speculative energy stocks that may have a spectacular growth spurt, even though the risk of failure is greater? Let us know what you think.
Comments
Brian
Morning Pat:
I think with this question as to the energy stocks to meet a minimum qualifacation before they are considered for a portfolio just makes common sense to me. The way I see it right now is that the markets are starting to see some uncertainty, We have the american market slipping away from the canadian market as the americans continue to develop thier resourses. We are also facing a challenge to get both our LNG and oil to what appears to becoming a very congested market. Even when we get to market we are not getting the full value, we get a discount price. I think we could see some M&A happening as we move forward. Some businesses will become vulnerable as our markets shifts.At this point in time to take a chance and speculate on an investment could very easily end in a disappointment, But then again if you have some mad money and do your home work maybe you will end up on the positive side of the equation.
Regards: Brian
Thanks for this info; nice to know the percentages of oil to gas. Another hi yield is AET.un – Argent Energy located in Texas drilling for light crude. I noticed one of the Templeton funds carries it. I don’t think too many people are aware of it or why the div is so high. It’s an intereesting story and I would be interested in your opinion on it. Thanks so much!
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Morning Pat:
I think with this question as to the energy stocks to meet a minimum qualifacation before they are considered for a portfolio just makes common sense to me. The way I see it right now is that the markets are starting to see some uncertainty, We have the american market slipping away from the canadian market as the americans continue to develop thier resourses. We are also facing a challenge to get both our LNG and oil to what appears to becoming a very congested market. Even when we get to market we are not getting the full value, we get a discount price. I think we could see some M&A happening as we move forward. Some businesses will become vulnerable as our markets shifts.At this point in time to take a chance and speculate on an investment could very easily end in a disappointment, But then again if you have some mad money and do your home work maybe you will end up on the positive side of the equation.
Regards: Brian
Thanks for this info; nice to know the percentages of oil to gas. Another hi yield is AET.un – Argent Energy located in Texas drilling for light crude. I noticed one of the Templeton funds carries it. I don’t think too many people are aware of it or why the div is so high. It’s an intereesting story and I would be interested in your opinion on it. Thanks so much!