FOCUS: Oil & Gas Stocks and Small-Mic Cap Canadian Equities
Market Outlook:
The oil market is rebalancing faster than most people realize due to good demand growth and imploding supply due to uneconomic prices. We expect oil to trade to $50/bbl by the end of 2016 and to $60/bbl in 2017. Further, we believe consensus is overestimating the response time of industry to higher oil prices and such the coming rally will be both higher and longer than most believe.
Small Caps continue to be dominated by macro back-and-forth concerns on global economic growth and the trajectory of US interest rates. As oil improves later this year the Canadian small cap sector should benefit from funds returning to our market. This should benefit not only oil stocks but also many companies with either exposure to the oil and gas sector or to Western Canada. We continue to find many compelling undervalued names.
TOP PICKS:
Cardinal Energy (CJ.TO)
Average cost of $8.11
Cardinal is a former darling that fell out of favour due to its product stream. Medium gravity oil sells at a discount to light oil and as such as oil has crashed Cardinal has been additionally penalized. As oil rallies, this additional leverage to the crude price will greatly benefit them as they have one of the higher sensitivities to the oil price, combined with a strong balance sheet, low declines, and an underbooked reserve report with additional resource upside. CJ trades at ~ 5.2X 2017 EV/CF versus its peers at around 7.0X. This makes no sense. We believe CJ could hit $12 in 2017.
Crescent Point Energy (CPG.TO)
Average price of $17.21
Crescent Point has made itself much more palatable to the deep pockets of institutional money which have been largely absent from the name in recent years due to its historically high dividend payout ratio and buying binge. Given the new focus on growth over dividends, we expect CPG to benefit from a flow of funds that will come out of SU as oil rallies. CPG trades at 6.4X 2017 EV/CF and we think it could regain its historical multiple of 8.0X which would equate to a $23 stock = 30%+ upside.
Exchange Income Corp (EIF.TO)
Average price of $23.52
Exchange Income is a “sleep at night” dividend payer that has executed very well over the past several year. Yielding 6.8% we believe the company will be able to continue to slowly increase the dividend in the next several quarters.
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| CJ | Y | N | Y |
| CPG | Y | N | Y |
| EIF | Y | N | Y |
Past Picks: Apr. 6, 2015
Trinidad Drilling (TDG.TO)
| Recommended at: | Now at: | Change | Total Return |
|---|---|---|---|
| $4.71 | $1.62 | -65.61% | -64.27% |
Western Energy Services (WRG.TO)
| Recommended at: | Now at: | Change | Total Return |
|---|---|---|---|
| $7.00 | $2.27 | -67.57% | -64.70% |
goeasy (GSY.TO)
| Recommended at: | Now at: | Change | Total Return |
|---|---|---|---|
| $21.01 | $18.53 | -11.80% | -9.77% |
Total Return Average : -46.25%
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| TDG | N | N | N |
| WRG | N | N | N |
| GSY | N | N | N |
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