Oil and gas─’tis the season to be jolly

The MoneyLetter recently surveyed the oil and gas markets which traditionally have been kind to investors from late November to early May. Income investors especially will find some rewarding yields from this selection.

Oil and Gas Markets

Oil and Gas stocks are ‘in season’ and offer some solid income opportunities.

It’s been about six months now since several analysts turned bullish on energy stocks, even though the price of crude has remained stagnant or in decline. Expectation of inflation and the rise of interest rates have led several other analysts to affirm or add to the overweight position. But whether you follow certain analysts or your own intuition, it’s increasingly looking like energy stocks is the place to be—or at least on the sidelines, waiting to take a position.

The months from late November until early May have historically been kind to energy investors. Last year wasn’t so hot, but far more often the months ahead have produced decent returns. But the current global uncertainty and better US and global economic growth are the wind at the energy sector’s back. The positive factors influencing a potential increase in energy demand are continued US growth and developing nations’ need for oil as they continue to modernize and improve infrastructure.

One cannot underestimate the positive impact of the technological revolution on oil, specifically the widespread use of fracking and other innovations to reduce production costs. And with cube drilling (simultaneous drilling and fracking) almost ready for action, future improvements in production are not far way. Unfortunately, the efficiencies reduce the head count in the oil fields. Finally, the reserve life index is shrinking. It measures how long it will take for a resource to become depleted at the current rate of production. The index is currently in the low 5-7 year range.

Top-picks Suncor and Canadian Natural Resources

It’s not hard to pick a favourite energy stock as many observers like the same ones. Good examples are Suncor (TSX—SU) and Canadian Natural Resources (TSX—CNQ), both of which observers and analysts alike listed as their one-two top stock picks in the energy sector. It’s hard to disagree, while waiting for the pipes to be turned back on, which is one way of characterizing the slumbering energy stocks of the past 12 months or so. If there is a favourite (and it can fall out of favour with an announcement about oil sands activity and its environmental impact) it is Suncor, mainly because of its higher price. On the other hand, CNQ may have more room to travel up, considering its current price. Nine analysts have a $70.00 target on Suncor. It is also the country’s largest integrated energy company, with production, refining and retail divisions. The diversified revenue stream provides investors with a hedge against volatility in oil prices.

Enbridge leads the pipeline group

Among the all-important pipelines, the resounding favourite is Enbridge (TSX—ENB). While pipes are currently in disfavor because of recent uncertainty about the Keystone Pipeline, the advisor community is very positive on the stock. One reason for the optimism is that the company’s CEO, Al Monaco, recently came out boldly and said that he fully expects the Enbridge pipelines to be full in 2019 and beyond. Keep in mind that the statement comes after accounting for the company’s Line 3 Replacement project, the company’s biggest yet. A not-too-shabby 6.7 per cent yield makes it a great stock for income-seeking investors.

TransCanada Corp.─pipelines and power generation

It’s impossible to discuss pipelines without mentioning TransCanada Corp. (TSX—TRP). It has a 5.2 per cent yield and operates three business segments: (i) natural gas pipelines, which transport gas across Canada, the US and Mexico, and which has natural gas storage facilities in Michigan; (ii) liquids pipelines, which consists of wholly-owned and operated crude oil pipeline systems that connect Alberta and US crude oil supplies to US refining markets, as well as connecting US crude oil supplies from the Cushing, Oklahoma, hub to refining markets in the US Gulf Coast; and (iii) energy, which includes a portfolio of power generation assets in Canada and the US and unregulated gas storage assets in Alberta.

AltaGas yield makes it a popular pick

At a 10.1 per cent yield, it’s not hard to understand why AltaGas (TSX—ALA) is a favourite among analysts. It is an energy infrastructure company with a focus on natural gas, power and regulated utilities. AltaGas’ operating segments are (i) Gas (including natural gas liquids (NGL) processing and extraction plants, transmission pipelines to transport natural gas and NGL, natural gas gathering lines, field processing and natural gas storage facilities, energy consulting and sale of natural gas and electricity); (ii) Power (including coal-fired and gas-fired power output under power purchase arrangements and other agreements, gas-fired power, wind and run-of-river power plants, and sale of power to commercial and industrial users in Alberta); and (iii) Utility including regulated natural gas distribution assets.

Pembina offers integrated energy infrastructure

Widely-followed Pembina Pipeline (TSX—PPL) has a 5.1 per cent yield that appeals to income investors. Pembina has four operating segments: (i) conventional pipelines, which is a tariff-based operation consisting of pipelines and related facilities that deliver crude oil and natural gas liquids; (ii) oil sands and heavy oil business, which consists of the Syncrude Pipeline, the Cheecham Lateral and the Horizon Pipeline; (iii) midstream and marketing business, which consists of direct and indirect interests in a storage operation, a direct interest in terminals, storage and hub services under a mixture of short, medium and long-term contractual arrangements; and (iv) gas services business which consists of natural gas gathering and processing facilities.

STEP Energy Services offers oil field services

One of the favoured oil services stocks is STEP Energy Services (TSX—STEP), which operates in Alberta and Texas. The company’s coiled tubing segment operates 22 deep-capacity coil spreads, with integrated monitoring services. Its fracturing solutions segment currently deploys 209,000 HP, responsible for two-thirds of the company’s revenue. Last April, the company completed the acquisition of Tucker Energy Services, an American energy services company with 192,500 HP, for US$275M.

This is an edited version of an article that was originally published for subscribers in the November 2018/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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