Any industry-wide decline will usually highlight significant opportunities in exceptional companies within that sector. The challenges in the worldwide energy market have negatively impacted most Canadian oil and gas stocks. But the red ink in the industry has served to highlight these two top-performing stocks that have caught the eye of investment analysts.
Crescent Point Energy Corp. (TSX—CPG; NYSE—CPG) and Tourmaline Oil Corp. (TSX—TOU) are two companies that have a solid track record of performance. Both companies, according to a number of analysts, have a considerable future upside as the slow but inevitable price recovery begins in the oil and gas sector.
The Investor’s Digest of Canada September all-sectors survey of analysts places Tourmaline Oil in a tie for third place on our top-10 ‘buy’ list, recommended as a ‘buy’ by six out of six analysts. Meanwhile, Crescent Point is tied for fifth place, rated as a ‘buy’ according to five analysts and a ‘hold’ by one other.
This is a bit of badly needed good news in the embattled energy sector. Both Crescent and Tourmaline are profitable in the current low-priced environment. Both companies are navigating the volatile pricing environment by improving their production metrics.
CPG leads pick-up in oil and gas drilling activity
One of the leading indicators of any recovery in this sector is an increase in exploration and investment in new properties. Companies that have sufficient vision and strong balance sheets can strategically position themselves while others merely focus on survival. Oil and gas industry watchers routinely monitor drilling activity as an important bellwether.
Interestingly, Pipeline News reported in mid-August that Crescent Point was the most active driller with Tourmaline coming in second. Crescent Point Energy recently announced that it was about to close on two acquisitions in Saskatchewan while disposing of a small non-core asset in Alberta’s Peace River region. This move underlines that the company intends to continue its strategy of being portfolio-disciplined.
Reviewing Crescent Point, analysts Kristopher Zack and Chris MacCullough of Desjardins Capital Markets said: “We are maintaining our $26 share price target and would continue to buy the stock at current levels in view of the significant leverage to higher oil prices and improved sustainability ratios.”
It’s time to buy this natural gas producer
The upbeat outlook on Tourmaline Oil that analyst Fai Lee of Odlum Brown espouses sounds remarkably similar. Mr. Lee said in his report: “Future production growth potential combined with our bullish outlook for natural gas prices make us very optimistic about Tourmaline’s investment return potential.” He has reiterated a ‘buy’ recommendation with a $50 per share 12-month target.
Tourmaline has been growing at an impressive pace in the past five years and is currently one of the top-five natural gas producers in Canada. With a solid balance sheet and disciplined cost controls, Tourmaline is focused on increasing shareholder value. It is noteworthy that management insiders own approximately 30 per cent of the stock, something that ought to elevate investor confidence.
Mr. Lee speculates that Tourmaline’s longer-term business strategy may be to become an acquisition target given that key members of management were involved in the start-up and subsequent sale of both Duvernay Oil Corp. and Berkley Petroleum Corp. The positive views of our analysts may suggest three things investors ought to bear in mind about energy stocks in 2016.
First, well-managed companies are always a good longer-term investment; even when falling commodity prices are the order of the day. Second, it is wise to seek out low-cost producers and take advantage of the general sluggishness of stock prices before the onset of a rebound in company valuations drives share prices higher. Third, when companies start investing in exploration and development, it is usually a precursor of better overall results in the energy sector.
Investor’s Digest of Canada, MPL Communications Inc.
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Investor's Digest of Canada •10/2/16 •