Swanzy Quarshie, portfolio manager, Sentry Investments

Focus: Oil & Gas stocks

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OIL MARKET OUTLOOK:

The move we’ve seen in oil prices since the Feb 11, 2016 low of $26.05 has certainly gone a long way to ensure that oil and gas producers are able to operate as a going concern, however, the industry continues to suffer under current market conditions. This is especially evident in the U.S. where cuts to capital programs have pushed production in that country to the 8 million barrel per day (b/d) mark after peaking at 9.6 million b/d during the first half of 2015. Given the financial conditions of most North American companies, we do not expect rig activity to increase materially until we see a sustained move in oil above $50. We expect oil prices to continue to rise through the balance of the year as the markets move into balance, however we expect ongoing volatility as investors remain skittish about Iranian output potential, Iran/Saudi relations and global demand in addition to other factors.

We are becoming cautiously optimistic on the short to medium term outlook for the U.S. natural gas markets, however, this has yet translate to the Canadian market where we continue to see challenges on the demand side and limited visibility on liquefied natural gas exports from the B.C. West Coast.

Top Picks:

ARC Resources (ARX.TO)

Cost base of $26.28/share, last purchase April 5, 2016 at $17.61/share

ARC Resources is a dividend paying oil and gas producer with assets in North East British Columbia, Alberta and South East Saskatchewan. The company’s current activity is centered on its NEBC Montney assets. ARC has a high quality asset base and deep inventory of low risk drilling opportunities. This asset portfolio offers investors a balance of liquids production, which forms the bulk of cash flow, and natural gas production, which provides long term leverage to Canadian gas prices. ARC Resources is managed by one of the most highly regarded management teams in Calgary with a proven track record of prudent capital management and good return on capital generation. We view ARC as a core position and view it as a long term value creator for shareholders.

Bonterra Energy (BNE.TO)

Cost base of $28.36, last purchase May 5, 2016 at $25.49/share

Bonterra Energy is a dividend paying oil and gas company headquartered in Calgary. The company has proven to be an industry leading operator in its core Pembina Cardium area in West Central Alberta where it has shown dramatic cost savings and efficiency gains over that past few years. Bonterra is run by a strong, well aligned management team with a long history of creating value for shareholders. Ongoing efforts to reduce costs and improve capital efficiencies have helped to position Bonterra well in the event that oil prices continue to rise. With no hedges and a business that can live within cash flow, we view Bonterra as good exposure for investors looking for upside to rising oil prices.

Raging River Exploration (RRX.TO)

Average cost per share of $7.71, last purchase on May 4, 2016 at $9.34 per share

Raging River is an oil weighted company with a focus in the Dodsland Viking play in Saskatchewan. Since inception the company has consistently grown production on a per share basis primarily through organic drilling activities. Raging River has been able maintain growth in an environment where most oil companies have been forced to shrink and look to grow an additional 15 percent per share this year with minimal impact to the balance sheet. We view Raging River as a well-managed, high quality oil company with excellent growth and free cash flow potential in a rising commodity price environment. 

Fund Profile

Sentry Energy Fund

Performance as of: April 30, 2016

1 month: Fund 4.8%, Index*2.17%

1 year: Fund -18.71%, Index*-16.54%

3 year: Fund -18.58%, Index*-19.98%

* Index: S&P/TSX Capped Energy Index

*RETURNS NET FEES

Twitter: @Sentryinvest

Website: www.sentry.ca