2 oil and gas stocks to buy

Two Canadian oil and gas stocks selected by analysts as ‘buys’ were recently featured in ‘The Oil Patch’ review section of The MoneyLetter.

Gibson Energy Inc. (TSX—GEI)

On December 6, oil and gas stock Gibson Energy announced its 2022 capital plan, which was largely as Scotiabank analyst Robert Hope expected. At around $150 million in growth capital expenditures, it is at the lower end of the company’s target of between $150 million and $200 million, and slightly below Mr. Hope’s estimate of $160 million. The company’s 2022 maintenance capital guidance of between $25 million and $30 million is in line with the analyst’s $28-million estimate.

“We expect Gibson will fund the majority of its capital plan with retained cash flow, and that its already-low leverage metrics will further strengthen in 2022,” says Mr. Hope. “If marketing conditions improve, the company could accelerate the return of cash to shareholders via a buyback or a larger increase in the dividend,” he adds. (He expects a three per cent hike.)

The analyst recently spoke with Gibson’s chief financial officer, Sean Brown, at the Scotiabank Global Banking and Markets Energy Infrastructure Conference. Mr. Hope reports that Mr. Brown outlined “a number of potential growth opportunities” for the company, including in the renewable diesel segment and diluent recovery unit expansion. “The company is well down the path of evaluating the development of a renewable diesel facility, with engineering progressing and customer conversations ongoing,” Mr. Hope explains. He adds that this investment could cost between $600 million and $650 million, and will not be decided upon until late 2022 at the earliest.

The analyst gives Gibson a Sector Perform recommendation. Twelve months ago, Mr. Hope reported a similar outlook for the company, with a 2021 capital plan largely in line with his past expectations. In a Dec. 7, 2020, report, the analyst said Gibson was in a solid financial position to focus on growth and development due to steady cash flow and lower interest rates at the time.

Gear Energy Ltd. (TSX—GXE)

Oil and gas stock Gear Energy Ltd. has made notable strides in its goal to reduce net debt, says Beacon Securities analyst Kirk Wilson. He is looking for this trend to have continued in the fourth quarter, which would lead to net debt falling to $17 million by year-end 2021 (from $52.9 million at year-end 2020). Furthermore, if oil prices remain at these high levels, then “Gear will have ample free cash flow to deploy as it chooses,” according to Mr. Wilson. The analyst maintains his Buy recommendation.

In its monthly update, Gear provided preliminary third-quarter 2021 results for select categories. The company’s quarter-over-quarter free cash flow generation was relatively flat at $5.7 million. Mr. Wilson expects a hefty free cash flow yield of 14 per cent in 2022. Production in the quarter averaged 5,859 barrels of oil equivalent (BOE) per day, which was seven per cent above the analyst’s expectations. However, the company’s funds from operation (FFO) of $16 million was within one per cent of his forecast, due mainly to hedging and slightly higher cash costs.
Gear acquires, develops and holds interest in petroleum and natural gas properties.

This is an edited version of an article that was originally published for subscribers in the January 2022, Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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