CIBC Analyst: Current Market Sell-Off Rare Opportunity to Create Value

The market sucks, but oil and gas royalty trusts, along with their junior counterparts, have a weapon in their arsenal others may lack: cash.

Mark Bridges, an analyst at CIBC World Markets, wrote in a note to clients on Tuesday:

We believe that the current market sell-off has presented a rare opportunity for producers to create value through share buybacks. Why spend capital to add reserves at $20.00 per barrel of oil equivalent when a producer can simply use this capital to buy its own stock back at $10.00/boe?

When the energy market bottomed out a decade ago, producers lacked stacks of dough. But now they are flush with cash, and energy prices are still high enough for them to turn a profit. But with debt and equity markets closed for business, oil and gas companies have to start “living within cash flow,” Mr. Bridges wrote.

Because most companies didn’t go on a drunken spending spree as commodity prices climbed higher this summer, they now have a cushion to soften the market’s punches.

The analyst said:

While maintaining a strong balance sheet and without increasing leverage, the list of candidates we feel could create the most value by redirecting capex dollars to initiate share buybacks include: ARC Energy Trust (AETUF.PK), Enerplus Resources Fund (ERF), Pengrowth Energy Trust (PGH), Penn West Energy Trust (PWE), Vermilion Energy Trust (VETMF.PK), and Zargon Energy Trust (ZARFF.PK).  A slew of juniors also made the cut, including: Anderson Energy Ltd. [TSX:AXL], Celtic Exploration Ltd. [TSX:CLT], Crew Energy Inc. (CWEGF.PK), Galleon Energy Inc. (GLNYF.PK), Highpine Oil & Gas Ltd. (HPNOF.PK), Orleans Energy Ltd. (OEXFF.PK), Paramount Resources, Ltd., ProspEx Resources Ltd. (PSPXF.PK), TUSK Energy Corp. (TSGYF.PK) and Welton Energy Corp. (WLEYF.PK).

Comments

[FulhamFC:]

Nexen (NXY) started a buy back Oct 8 and it looks like they ahead of the curve. Marvin Romanow was "2007 CFO of the year" and its times like this that is shows.

2008 Oct 16 11:42 PM

[pickaroonwyo:]

Nexen has JV with OPTI-Canada. Any news on OPTI?

2008 Oct 17 08:52 AM

[FulhamFC:]

Nexen Inc. chief executive Charlie Fischer confirmed Thursday in an interview with the Herald that a decision to expand its 70,000-barrel-per-day Long Lake oilsands project has been put on the backburner due to the volatility on world energy markets.
The company's board was to consider a second phase in the fourth quarter, but Fischer said it has been delayed indefinitely and probably won't come up again before 2009.
The Long Lake thermal oilsands project will officially open next week.

2008 Oct 17 08:59 AM

[January Thaw:]

There are tons more value stocks up there...The only thing one has to watch is the odd way the government has in conducting business...the oil
patch is a love/hate relationship with the government. So there's lots of
political stuff that can affect your stocks. There's also the difference
between the C$ and the US$...
But it's an investors dream up there right now.

2008 Oct 17 07:09 PM

[AmesTiedeman:]

The yields are getting quite high. I expect a rally in Oil soon..

2008 Oct 18 10:52 AM