Rethinking oilpatch stock picks
Start with price of crude: A different strategy for each oil price scenario
Paul Haavardsrud -- Financial Post
Given the drubbing oil and gas stocks took last week after oil prices fell to two-year lows, it stands to reason that there's money to made in the oil patch. The question investors are asking is what to buy.
As always the answer lies with commodity prices and that's become an even tougher call of late. Talk of supply cuts from Norway and Mexico yesterday lifted the price of West Texas intermediate crude US72¢ higher to US$19.15 a barrel. Last week, it fell as low as US$17.45 and the doomsayers were talking about a return to 1998 levels when it fell below US$11.
Here are a few scenarios and a heads up on which stocks could benefit under each:
Scenario 1: Oil falls below US$16.
If supply cuts don't come and a global economic recovery stretches into a 'U' instead of a 'V', oil prices could head much lower.
For Mark Heim, an analyst at Yorkton Securities Inc., the integrated producers -- Imperial Oil Ltd. (IMO/TSE), Petro-Canada (PCA/TSE), Shell Canada Ltd. (SHC/TSE), and Suncor Energy Ltd. (SU/TSE) -- are in the best position to weather the commodity price storm.
He recommends clients overweight integrated producers, due in part to the revenue stability provided by their downstream operations.
When crude prices drop, "... you tend to see marketing margins improve drastically," he said.
Ian Ollers, an analyst at Harris Partners, said Alberta Energy Corp. (AEC/TSE) would be his top pick given weak oil prices, due to the company's stable sources of cash flow in pipeline and natural gas storage.
"If you're fearful [about commodity prices] then AEC would be your first candidate."
Scenario 2: Oil shoots to US$24.
If the United States's war on terrorism drags on and draws in other Middle Eastern nations, a supply crunch could send the price soaring.
"If you really want to make the bet on oil, the one that springs to mind is Nexen [Inc.]," said Mr. Ollers, noting it is 80% oil-weighted.
Other big oil-levered producers singled out by analysts include Canadian Natural Resources Ltd. (CNQ/TSE) and Vermilion Resources Ltd. (VRM/TSE). Andrew Hogg, an analyst at Yorkton Securities, added that Canadian Natural and Vermilion each have hedging programs in place that protect them from falling prices, but leave room to benefit from improved prices.
Scenario 3: Oil sits between US$18 and US$20.
Consensus estimates are calling for oil prices to stay in this band. If prices stay in this range, the sector as a whole could be a good bet, according to John Manley, a strategist at Salomon Smith Barney in New York. "We believe that the risk of low oil prices has been mostly priced into stocks."
Mr. Manley said the sector is trading at a 30% to 35% discount to the broader market. The last time the group traded at such a large discount was in 1985, after which the sector outperformed the broader index by 30% in the next two years.
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