These 3 Canadian Oil And Gas Companies Are Worth A Look

Includes: LSTMF, OBE, PGH
by: Michael Blair

Canadian oil and gas stocks seem to be making a bit of a comeback, possibly on hopes that the transportation bottlenecks that have plagued Alberta crude will be relieved by a combination of new pipelines and increased rail usage. At the same time, many players are enjoying recycle ratios that make it very profitable to drill.

Three names worth a look are:

1. Pengrowth Energy (NYSE:PGH) with a solid 7.8% dividend yield and promising Steam Assist Gravity Drainage (SAGD) growth at Lindbergh. Pengrowth current production of over 86,000 Barrels of Oil Equivalent (BOE) per day is 57% oil weighted and will benefit from any reduction in the gap between Alberta oil prices and West Texas Intermediate.

With long reserves and a recycle ratio in key oil lands of 3.0 Pengrowth has plenty of opportunity to show growth in cash flows. The stock has risen 25% in the past 6 months and seems poised to go higher. I hold 110,000 shares for income.

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2. Lightstream Resources (OTC:LSTMF) is more speculative but interesting. Yielding 12.5% and producing over 45,000 BOE per day, Lightstream is 81% oil weighted. The company had a recycle ratio of 1.8 times in 2012 replacing 229% of production at the drill bit. Lightstream has debt leverage and could suffer if commodity prices fall, but at current prices combines substantial cash flow potential with high yield. Of course that yield could disappear quickly in a low oil price environment so it is a company not for the faint of heart. The stock has had a rough year but is up almost 10% this month and may be bottoming. I own 60,000 shares for income and speculative growth.

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3. Pennwest Petroleum (PWE) is another asset rich Canadian oil and gas producer with a healthy 4.8% yield and annual production of about 140,000 BOE per day of which 63% is oil. The company has one of the best land spreads in the Western Canadian basin, a new management team and a strong board of directors which includes Rick George, former CEO of Suncor. The company has suffered from poor capital efficiencies in recent years with recycle ratios below 1.0 and has initiated major changes to staffing and a strategic review process. I believe the changes will be successful and return this once stock market darling to some of its former strength as the management group works to uncover value from the massive asset base and put the company on a growth path again. The stock has moved up almost 15% in recent weeks and will trade higher if there are signs of progress in the strategic review. I am long 12,000 shares for income and speculative growth.

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Oil and gas companies are long term asset plays by and large. With an expanding economy and continued turmoil in the Mid-East I believe oil prices will stay in a range of $90 to $110 a barrel for some time, and Canadian oil and gas companies will see higher domestic prices as the discount to WTI narrows with transportation bottlenecks eased in the 2014 to 2015 time frame. If these do occur, the stocks of these three companies could be major beneficiaries. Not without risk, every portfolio should have some weighting in oil and gas in my view and Pengrowth, Lightstream and Pennwest are reasonable candidates for inclusion.

Disclosure: I am long PGF, PWE, OTC:LSTMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.