Energy stocks attractive as oil costs rise
The Canadian Press, Tuesday, October 28
By Malcolm Morrison
TORONTO -- Investors hit by higher fuel bills may have a way of helping to defray those costs -- by picking up energy stocks.
There's a growing feeling that share prices in the energy sector are unrealistically low because there is a disconnect between what analysts believe such shares are worth given their estimates of oil and gas prices, and where actual prices of the commodities could go based on tighter global supply.
"Oil, as far as the equity markets are concerned, is pegged at $22 to $24 US," points out Jeff Rubin at CIBC World Markets.
"We think that oil is going to be around $30 for the next year. And if that's the case, then oil firm cash flows are going to come in anywhere 20 to 25 per cent higher than is currently embedded in market valuations."
Rubin argues oil will hover around the $30 level based on calculations that global spare oil production capacity is at its lowest since 1992.
He also notes that inventories in the United States remain near three-decade lows, "while inventories for the entire OECD (Organization for Economic Cooperation and Development) area are now at the bottom of their historic range."
Also keeping the price of crude oil high are North American refineries, which are already running flat out, performing a high-wire act of producing enough gasoline for the peak driving season during the summer, while making sure enough heating oil is on tap for the winter.
"So the only arguments for $20-$22 dollar oil is some miraculous return, in the very near term, of Iraq production to the golden age of Iraqi production prior to Saddam's war with Iran and Kuwait," Rubin says.
"The reality is that Iraq isn't even back to pre-war production levels."
The natural gas supply picture doesn't look any better.
"Gas is going to be in short supply," says Gedd Cantwell, vice-president of National Bank in Calgary.
"We have not been replacing our reserves and if that's the case, when you're dealing with a limited supply or a dwindling supply, prices go higher," he adds.
Given supply constraints, Rubin believes Canadian energy stocks generally are undervalued by 20 to 25 per cent, and thinks opportunities for gains exist among both junior and senior companies.
Brian Acker, president and CEO of Acker Finley Inc. in Toronto, thinks differently.
He sees greater risk in junior energy companies, pointing out there is "a greater reward but also the greater risk.
"Why even risk it?" he says of betting on junior oil and gas players against market heavyweights such as Suncor, PetroCan or Nexen.
Other companies Acker believes are worth looking at include Compton Petroleum, PetroKazakhstan "and the one that stands out is Husky Energy."
He also recommends investors who really want to buy stocks in smaller natural gas producers should own a group of them in a portfolio.
"Not just one or two, but try to get a portfolio of even a dozen; and that way it leeches out your risk."
All the companies mentioned by Acker are trading below their 52-week highs.
In the junior segment, Cantwell identified Cavell Energy as "a great little company."
The company is currently trading around $2.00, also below its 52-week high of $2.82.
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