Doug / Downside Risk
Do I think there is downside risk from today's share prices on the senior oils. Yes, at least to the lows of a couple weeks ago. Let me further stress, there is yet further downside on some companies, more so than others.
Exploration success over the past 1 to 1-1/2 years is very important. We're entering a year where emphasis will be placed on developement drilling and lower cost of doing business. Exploration targets must be focused. Many of the companies will not obtain the profits realized this past year. There are companies in the group that need an infusion of cash flow and it won't happen with just operations. look for the weak to be buyers of cash flow via acquisitions -- and only if their balance sheets allow for such acquisitions.
One must focus attention on the emerging seniors, rather than rest on old star status. Renaissance Energy and PanCanadian Petroleum are fine examples. Three years ago, both were the darlings of this group. These two companies had dominated the drilling scene in Canada. I now consider them at the bottom of the group in terms a near future growth -- 12 to 24 months down the road. On the other hand, seniors such as Talisman Energy and Canadian Occidental have been very successful in establishing a foundation for superior growth over the same near term period.
The point I'm attempting to make is that one now must focus on selective companies, no matter what size group they fall within. As for the Senior Oil's, it's especially true. The further downside risk over the near term is much greater with RES and PCP, rather than TLM and CXY. I believe the prior lows of two weeks ago is the separation point between these companies. TLM and CXY should flatten out at that point if the oil & gas sector remains in a negative image. The other two will drift further downward.
For the longer term, the perspective is quite different in terms of looking at downside risk at today's share prices. One could probably look back five years from now and think -- gosh, shares in RES and PCP were really cheap back in early 1998. That's reasonable thinking because both companies are well managed and their shortcomings in this near term oncoming period should prove to be temporary. If I were a holder of shares in these companies right now, I wouldn't be looking to sell. On the other hand, I wouldn't be looking to buy either. Instead, I would be looking to add to these senior oil holdings by buying shares of the emerging senior oils. One last point, don't overlook the intermediate size company, for some can be catogorized as emerging seniors also.
Well almost the last point. Let me close with this thought in mind. If one is a believer in the longer term outlook for the Canadian Oil & Gas Industry, now is not a bad time to be a buyer. But, I have said in the past -- don't rush in all at once, accumilate shares in the companies you believe in. Building positions in this manner will cushion the downside risk and allow one to accumilate shares at low prices for those successful companies of tomorrow.
One man's perspective. |
