Gordon Pape, Editor and Publisher of the Internet Wealth Builder updates his position on energy stocks: EnCana Corp., UTS Energy Corp., and Suncor Energy.
EnCana Corp. (TSX, NYSE: ECA)
Originally recommended by Yola Edwards on Oct. 23/06 (IWB #2638) at C$53.47, US$47.55. Closed Friday at C$55.28, US$45.67. Updated by Gordon Pape.
When I last updated EnCana in the issue of March 2, I suggested taking new positions on any pullback to the $45 range (the shares had closed the previous Friday at $50.01). Although the price never got that low, the shares did trade down to $45.67 in the week that followed. If you picked some up then, you got a bargain that you may not see again.
EnCana stunned market watchers on Wednesday when it announced first-quarter net earnings of $962 million ($1.28 per share). That compared to a profit of $93 million (12c a share) in the first quarter of 2008. Granted, a big chunk of the profit was attributed to a mark-to-market unrealized gain of $89 million in hedging contracts. But even taking that into account, the numbers were much better than analysts expected and the share price jumped. (Note that EnCana reports its earnings in U.S. currency.)
Hedging plays a major role in the company's business strategy, especially in the natural gas sector. EnCana has hedged about 2.6 Bcf/d of expected gas production through October 2009 at an average NYMEX equivalent price of $9.13 per Mcf.
"This price hedging strategy increases certainty in cash flow to help ensure that EnCana can meet its capital and dividend requirements without substantially adding to debt," the company said in a statement.
Cash flow for the quarter was $1.9 billion ($2.59 per share) while operating earnings were $948 million ($1.26 per share). These figures were down 18% and 9% respectively on a per share basis compared to the first quarter of 2008 but were well ahead of estimates and in line with EnCana's guidance for 2009.
The company confirmed that its quarterly dividend will remain at US40c a share (US$1.60 annualized) with the next payment due on June 30 to shareholders of record on June 15. Based on Friday's closing price, the stock is yielding 3.4%.
Even with last week's price jump, the shares are well down from their 52-week high of $97.81 and it will be a long time before we see those levels again. However, there are indications the price of oil has stabilized in the US$45-$55 range and I expect we will see it gradually rise later in the year as signs of a recovery begin to appear.
The shares offer a better yield than you'll get from a GIC or money market fund plus significant upside potential down the road. The stock will likely continue to be volatile so watch for entry points around the $50 range.
Action now: Buy at $50-$51. -G.P.
UTS Energy Corp. (TSX: UTS)
Originally recommended by Yola Edwards on April 16/07 (IWB #2715) at $4.79. Closed Friday at $1.66. Updated by Gordon Pape.
UTS is desperately trying to fend off a hostile takeover bid from Total E&P Canada, a wholly-owned subsidiary of French energy giant Total SA. In a statement released on April 16, UTS said its board of directors has unanimously rejected a sweetened offer of $1.75 a share for the company, calling it "inadequate".
"Several of our largest shareholders have publicly stated their ongoing opposition to, and dissatisfaction with, Total's bid," said CEO Dennis Sharp. "The revised bid in no way reflects improving industry fundamentals, remains lower than the sum of UTS' cash and remaining earn-in and attributes no value to our excellent and expanding suite of oil sands assets."
The main focus of UTS is the production of bitumen from the oil sands deposits associated with the leases related to the Fort Hill oils sands project, the Equinox oil sands project, the Frontier oil sands project, and Leases 022, 023 & 421.
UTS holds a 20% interest in the Fort Hills Project through its interests in Fort Hills Energy Corporation and the Fort Hills Energy Limited Partnership. The other Fort Hills Partners are Petro-Canada with a 60% working interest and Teck Cominco with a 20% interest. The Petro-Canada stake is significant in the light of the recent announcement of a bid by Suncor to take over the company. Suncor has decades of experience in the oil sands and, if the deal goes through, is expected to restart work on Fort Hills which has been on hold. That in turn would increase the value of the UTS position.
Total, which is seeking to expand its oil sands interests, originally offered to buy out UTS investors at $1.30 a share. After that offer was dismissed out of hand by the UTS board, Total came back with its new $1.75 bid and extended the date for tendering shares to April 27 at 8 p.m. EDT.
On Wednesday, the French company took out half-page ads in several newspapers urging UTS shareholders to accept the deal and pointing out that prior to the initial offer the stock was trading in the 80c range.
"The board of UTS has not put forward another proposal and no other bidder has emerged," the ad said. "Should shareholders reject our offer, the value of UTS shares will once again be subject to the many risks and uncertainties facing capital intensive developments in the oil sands."
While all that is undoubtedly true, the market seemed to think that Total will come back with a still higher bid if this one is turned down. The stock consistently traded over $1.80 after the new offer was announced until Thursday. At that point, investors seemed to lose hope and the shares finished the week at $1.66, below the Total offer price.
Action now: Tender. The stock price will probably fall significantly if the Total offer is rejected. -G.P.
Suncor Energy (TSX, NYSE: SU)
Originally recommended by Gordon Pape on June 12/06 (IWB #2622) at C$41.63, US$37.57 (split-adjusted). Closed Friday at C$30.80, US$25.54.
EnCana reports a big profit and its shares rise. Suncor reports a first-quarter loss, but its shares rise too. What's going on? It appears investors are looking past the $189 million loss (20c a share) and focusing instead on a significant increase in production and the fact the company would have posted a profit had it not been for various accounting losses.
Taking these out of the equation, Suncor would have earned $227 million (24c per share) in the quarter compared to $805 million (87c per share) in the first quarter of 2008. Cash flow from operations was $479 million, down from about $1.2 billion last year due to much lower oil prices.
"If you back out the effects of accounting impacts from mark-to-market and foreign exchange losses, and the non-structural charges for deferred growth projects, you'll see that from an operational perspective we had a solid quarter, while financial performance was reflective of current economic conditions," said CEO Rick George. "Downstream margins were strong and we reported record quarterly production in the upstream."
Total production averaged 314,500 barrels of oil equivalent per day (boe/d) during the first quarter, 278,000 barrels of which came from the oil sands. This compares with 286,200 boe/d (248,000 from the oil sands) in the first quarter of last year.
Oil sands cash operating costs averaged $33.70 per barrel in the quarter compared to $31.55 a year ago. The company said the increase was primarily due to higher operating expenses, which were partially offset by lower energy input costs and reduced third-party bitumen purchases.
Suncor shares rose 86c in Toronto on Thursday after the results were announced and were up another 47c on Friday to finish the week at $30.80. The stock has now gained 64% since it hit a three-year low of $18.80 last November.
Action now: Buy. -G.P.
EnCana Corp. (TSX, NYSE: ECA)
Originally recommended by Yola Edwards on Oct. 23/06 (IWB #2638) at C$53.47, US$47.55. Closed Friday at C$55.28, US$45.67. Updated by Gordon Pape.
When I last updated EnCana in the issue of March 2, I suggested taking new positions on any pullback to the $45 range (the shares had closed the previous Friday at $50.01). Although the price never got that low, the shares did trade down to $45.67 in the week that followed. If you picked some up then, you got a bargain that you may not see again.
EnCana stunned market watchers on Wednesday when it announced first-quarter net earnings of $962 million ($1.28 per share). That compared to a profit of $93 million (12c a share) in the first quarter of 2008. Granted, a big chunk of the profit was attributed to a mark-to-market unrealized gain of $89 million in hedging contracts. But even taking that into account, the numbers were much better than analysts expected and the share price jumped. (Note that EnCana reports its earnings in U.S. currency.)
Hedging plays a major role in the company's business strategy, especially in the natural gas sector. EnCana has hedged about 2.6 Bcf/d of expected gas production through October 2009 at an average NYMEX equivalent price of $9.13 per Mcf.
"This price hedging strategy increases certainty in cash flow to help ensure that EnCana can meet its capital and dividend requirements without substantially adding to debt," the company said in a statement.
Cash flow for the quarter was $1.9 billion ($2.59 per share) while operating earnings were $948 million ($1.26 per share). These figures were down 18% and 9% respectively on a per share basis compared to the first quarter of 2008 but were well ahead of estimates and in line with EnCana's guidance for 2009.
The company confirmed that its quarterly dividend will remain at US40c a share (US$1.60 annualized) with the next payment due on June 30 to shareholders of record on June 15. Based on Friday's closing price, the stock is yielding 3.4%.
Even with last week's price jump, the shares are well down from their 52-week high of $97.81 and it will be a long time before we see those levels again. However, there are indications the price of oil has stabilized in the US$45-$55 range and I expect we will see it gradually rise later in the year as signs of a recovery begin to appear.
The shares offer a better yield than you'll get from a GIC or money market fund plus significant upside potential down the road. The stock will likely continue to be volatile so watch for entry points around the $50 range.
Action now: Buy at $50-$51. -G.P.
UTS Energy Corp. (TSX: UTS)
Originally recommended by Yola Edwards on April 16/07 (IWB #2715) at $4.79. Closed Friday at $1.66. Updated by Gordon Pape.
UTS is desperately trying to fend off a hostile takeover bid from Total E&P Canada, a wholly-owned subsidiary of French energy giant Total SA. In a statement released on April 16, UTS said its board of directors has unanimously rejected a sweetened offer of $1.75 a share for the company, calling it "inadequate".
"Several of our largest shareholders have publicly stated their ongoing opposition to, and dissatisfaction with, Total's bid," said CEO Dennis Sharp. "The revised bid in no way reflects improving industry fundamentals, remains lower than the sum of UTS' cash and remaining earn-in and attributes no value to our excellent and expanding suite of oil sands assets."
The main focus of UTS is the production of bitumen from the oil sands deposits associated with the leases related to the Fort Hill oils sands project, the Equinox oil sands project, the Frontier oil sands project, and Leases 022, 023 & 421.
UTS holds a 20% interest in the Fort Hills Project through its interests in Fort Hills Energy Corporation and the Fort Hills Energy Limited Partnership. The other Fort Hills Partners are Petro-Canada with a 60% working interest and Teck Cominco with a 20% interest. The Petro-Canada stake is significant in the light of the recent announcement of a bid by Suncor to take over the company. Suncor has decades of experience in the oil sands and, if the deal goes through, is expected to restart work on Fort Hills which has been on hold. That in turn would increase the value of the UTS position.
Total, which is seeking to expand its oil sands interests, originally offered to buy out UTS investors at $1.30 a share. After that offer was dismissed out of hand by the UTS board, Total came back with its new $1.75 bid and extended the date for tendering shares to April 27 at 8 p.m. EDT.
On Wednesday, the French company took out half-page ads in several newspapers urging UTS shareholders to accept the deal and pointing out that prior to the initial offer the stock was trading in the 80c range.
"The board of UTS has not put forward another proposal and no other bidder has emerged," the ad said. "Should shareholders reject our offer, the value of UTS shares will once again be subject to the many risks and uncertainties facing capital intensive developments in the oil sands."
While all that is undoubtedly true, the market seemed to think that Total will come back with a still higher bid if this one is turned down. The stock consistently traded over $1.80 after the new offer was announced until Thursday. At that point, investors seemed to lose hope and the shares finished the week at $1.66, below the Total offer price.
Action now: Tender. The stock price will probably fall significantly if the Total offer is rejected. -G.P.
Suncor Energy (TSX, NYSE: SU)
Originally recommended by Gordon Pape on June 12/06 (IWB #2622) at C$41.63, US$37.57 (split-adjusted). Closed Friday at C$30.80, US$25.54.
EnCana reports a big profit and its shares rise. Suncor reports a first-quarter loss, but its shares rise too. What's going on? It appears investors are looking past the $189 million loss (20c a share) and focusing instead on a significant increase in production and the fact the company would have posted a profit had it not been for various accounting losses.
Taking these out of the equation, Suncor would have earned $227 million (24c per share) in the quarter compared to $805 million (87c per share) in the first quarter of 2008. Cash flow from operations was $479 million, down from about $1.2 billion last year due to much lower oil prices.
"If you back out the effects of accounting impacts from mark-to-market and foreign exchange losses, and the non-structural charges for deferred growth projects, you'll see that from an operational perspective we had a solid quarter, while financial performance was reflective of current economic conditions," said CEO Rick George. "Downstream margins were strong and we reported record quarterly production in the upstream."
Total production averaged 314,500 barrels of oil equivalent per day (boe/d) during the first quarter, 278,000 barrels of which came from the oil sands. This compares with 286,200 boe/d (248,000 from the oil sands) in the first quarter of last year.
Oil sands cash operating costs averaged $33.70 per barrel in the quarter compared to $31.55 a year ago. The company said the increase was primarily due to higher operating expenses, which were partially offset by lower energy input costs and reduced third-party bitumen purchases.
Suncor shares rose 86c in Toronto on Thursday after the results were announced and were up another 47c on Friday to finish the week at $30.80. The stock has now gained 64% since it hit a three-year low of $18.80 last November.
Action now: Buy. -G.P.
