Thanks for joining us today for our chat! We'll begin soon
Hello Swanzy! Thanks for joining us today.
Could you start off by telling us a little bit about your investing approach?
Sure. Our goal is to find companies that create wealth for shareholders over time
That means finding companies with good assets, balance sheets, and management teams
What is your outlook on the oil market after the bounce back to $60 WTI? Can this rally be sustained?
We are getting a lot more comfortable with the fundamentals of the oil markets right now
We are seeing a very big pull back in US drilling activity which will eventually translate into a pull back in production
We are also encouraged by what we're seeing on the demand side with increases from large consumers globally
We believe that ultimately OPEC will act if this move higher is not sustained
although the saudis want to protect market share, they are very willing to act if other members of OPEC and Russia follow. That likely means the worst in terms of pricing is behind us.
What do you think will be the catalyst for a sustainable rally in oil prices? ... is it a noticeable production pullback?
It is that. But i think it is also continued growth on the demand side. Consensus numbers for demand growth keep growing and will likely do so for some time.
What are some of your favourite energy stock picks right now?
We still prefer oil to natural gas, but are likely to add some gas names leading further into the summer
On the oil side, one of my favourite names right now is Cardinal energy
This is a dividend payer with an excellent balance sheet and an payout ratio that is less than 100%.
Balance sheet is key here because if oil prices dont cooperate, this company can still maintain its balance sheet
For torque with some downside protection I really like Bankers Petroleum
This company is based in Albania and has a very large resource base, no debt and free cash flow. It is one that will add rigs in a rising oil price environment to provide investors with growth
Back in Canada, TORC Oil & Gas is another favourite
They just purchased some SE SK assets from Surge. This transaction improves the company's balance sheet, payout ratio and capital efficiencies
One the large cap side, CNQ is a must own for investors in this environment. This company is primed for low cost production with plenty of torque to natural gas and rising oil prices.
You mentioned your current preference for oil over natural gas. Can you explain? And what is your outlook for the natural gas sector?
The current environment for natural gas is very challenged
US production is still growing significantly. This is backing Canada out of some key markets in the US North East and Eastern Canada
This means that as bad as conditions are for US producers, it's even worse for Canadian producers
We have seen gas prices holding up because the pull back in drilling activity also impacted gas drill. As well, we've seen increased power burn demand due to low gas prices and coal plant retirement
But these are not all sustainable
We need long term exports off the continent. US exports to Mexico have picked up and this is helping, but the real key is to get liquefied natural gas offshore to Asia markets. This is coming, but will take time.
Lets take a reader question ...
We are not invested in any drilling companies right now. For context, the US rig count has fallen from a peak of 1609 rigs in Oct 2014 to 631 rigs today
Pricing power for a lot of service companies is non existent
I think it is an improved company with the takeout of CanElson, but it's not one that I would buy for a take out. It has a lot of integration work ahead of it.
Timely question. I just got out of a meeting with management 2 hours ago
Given that it pays 30% of its dividend with shares, the dividend is sustainable for at least a year in a $60 oil price environment. That is under current business conditions
But, you have to keep in mind that this is a company who's business conditions is improving (especially if they can close on the recently announced Legacy acquisition)
This improves the payout of the company and pushes sustainability out further
As well, I'm very encouraged by their cost cutting efforts as well as growing production under waterflood
Bottom line, if oil is $60 a year from now, the company will have a better looking business than they do today with all their efforts.