Joanne Hruska, market strategist at Integral Wealth Securities
Focus: Canadian oil and gas stocks

MARKET OUTLOOK

The Canadian oil and gas sector continues to struggle due in large part to the bureaucratic quagmire (including Bill C-69) stifling pipeline infrastructure creation. This had led to record differentials, and in recent weeks, all of these stocks have cratered. After the many years of a downturn in Canadian energy equities, we still feel that some companies will be able to handle short-term pain posed by low prices better than their peers. The number of companies as well as investors, analysts and funds in the Canadian energy space has decreased dramatically. We feel that once differentiation begins, it will be extremely polarizing to the have and have-not companies.

At the time of my last appearance earlier this year, we owned light oil companies and were staying away from heavy oil stocks due to differentials. We were also avoiding gas names because we thought low prices were going to lead to lower production following a drop-off in hedges. Although we haven’t changed our minds on oil names, in June we advised clients to start dipping their toes into well-capitalized gas companies with good assets. Though the sector is extremely cheap, we’re still warning investors to be selective. Focus on companies composed of strategically minded boards and management teams, with outlooks extending beyond next quarter, with a clean balance sheet and with lower operating costs. 

TOP PICKS

SEVEN GENERATIONS (VII.TO)

Canada’s largest condensate producer, Seven Generations, is transitioning from a high growth-at-all-costs company to a strategic, low-cost operator generating tremendous cash flow. We added it to the model portfolio on Oct. 4 at $16.36.

TORC OIL & GAS (TOG.TO)

This Saskatchewan-focused light oil producer is quite protected from apportionment and differentials and maintains a pristine balance sheet with cash flow and dividend growth potential. TORC was added to the model portfolio on Dec. 27, 2017 at $7.41.

KELT EXPLORATION (KEL.TO)

Kelt provides excellent exposure to liquids-rich Montney gas, with a great long-term track record of countercyclical land and production additions. We added Kelt to the model portfolio on March 7 at $6.40.

PAST PICKS: FEB. 2, 2018

RAGING RIVER EXPLORATION (RRX.TO)
Taken over on June 18 by Baytex (one Raging River share to 1.36 Baytex shares).

We removed Raging River from the model portfolio on the day the takeover was announced at $6.33.

• Then: $7.28
• Now: $2.29
• Return:-57%
• Total return: -57%

SPARTAN ENERGY (SPE.TO)
Taken over on April 16 by Vermilion (one Spartan share to 0.1476 Vermilion shares).

Spartan was taken over by Vermilion Energy. We still have Vermilion in our model portfolio as much of their production is not subject to wide Canadian differentials and they have excellent free cash flow.

• Then: $6.14
• Now: $31.86
• Return: -23%
• Total return: -23%

WHITECAP RESOURCES (WCP.TO)

We still have Whitecap in our model portfolio as they’re somewhat protected from wide differentials and apportionment with their Saskatchewan production.

• Then: $8.92
• Now: $5.74
• Return: -36%
• Total return: -34%

Total return average: -38%

TWITTER: @jojohruska
WEBSITE: integralcapitalmarkets.com