5 Canadian Oil and Gas Stocks to Invest In

by: The Patient Investor

I would like to thank everyone who wrote comments on my first part of the article on Canadian oil and gold stocks. Because of these comments, I thought I needed to expand on certain comments and also clarify some important points on the stocks I suggested.

I wrote my first article on SandRidge Energy, which went into my philosophy on investing and laid out the reasons for investing in detail. However, it was published second, so even though you may not be interested in SandRidge, I suggest you read that article for some background. I spend a substantial amount of time researching each of my investments. I will never suggest an investment unless I think it will increase in value significantly; I very seldom invest in a stock unless I can make a strong case that it will double in three years. Will all these stocks double in value? No.

The key to the Canadian resource stocks is doing the research on the company, and reading and analyzing the company's presentation and financial statements. And not investing in the Canadian market when metal or oil prices are declining, but rather at the bottom or when they are going up.

When investing in natural resource stocks the most important thing is getting a great resource. You can have the best management, but if the oil or gold resource is low quality, you will generally not make much money unless they have a technology that will turn that resource into a very good resource. For oil, it is horizontal drilling and fracing, and how the oil company uses them together. For gold, it is open pit heap leach mining.

The next most important thing is management. Even if you have a great resource, it is possible for management to bankrupt the company or get so many shares outstanding that it is impossible to make any real money on the company's stock. Management also needs to make certain it has the cash to develop the resource properly.

Why take the risk? Because you can make a lot of money if you understand the risks and turn the risks in your favor.

I have listed a group of five oil stocks to invest in, and I will provide you a brief overview of why I think they are good investments and the risks involved.

Primary Petroleum (PETEF.PK) This company has over 200,000 acres in the Alberta Bakken in western Montana, 20,000 acres in the Bakken in eastern Montana, and 60,000 acres in natural gas lands in the middle of Montana. It does not produce yet, but the company has a joint venture agreement on developing the 20,000 acres in the Bakken. In addition, in its latest company presentation, Primary showed a picture of a Bakken core taken from the northwest part of its land base. I have looked at the picture of the core and it is some of the best I have seen. The company has also looked at cuttings from over 30 other wells on its property and surrounding properties.

Primary has just raised 17 million dollars and is going to be drilling wells on its properties to test the land base this year. There are risks. The company has no production yet and has about 160 million shares with options and warrants outstanding. This stock has the most risk, since it has no income and is dependent on raising money through the sale of stock.

Rosetta Resource (ROSE) has 300,000 acres north of Primary's land position in the Alberta Bakken, which the company has stated in its company presentation contains 15-18 million barrels of oil in place per acre. Rosetta also continues to lease additional land in the area. Other operators surrounding Primary's land have also drilled wells but have not released the results, but they to are continuing to lease large amounts of additional land.

You could invest in Rosetta at over $42 a share and 40 times earnings; it does have substantial production and other good resource plays. Other operators in the area may also be an investment opportunity.

Bowood Energy (ROAOF.PK) This company is also in the Alberta Bakken play but on the Canadian side of the play. The company currently has production of 600 equivalent barrels a day, mostly of natural gas from non Bakken acreage. The company has about 100,000 prospective Bakken acres in a joint venture with a larger Canadian oil company. Bowood is just beginning to drill on its Bakken land. The company has a large number of shares outstanding, over 250 million.

Connacher Oil & Gas (CLLZF.PK) is primarily a SAGD (steam assisted gravity development) producer in the oil sands of northern Canada. It has a small refinery in Great Falls, Montana. Connacher just brought on a second pod in the oil sands this past quarter. This should increase production by 6,000 barrels a day, and it should increase by 1,000 to 2,000 barrels more this quarter for total production of about 13,000 barrels of Bitumen a day. Connacher is planning a future increase in production of 24,000 barrels a day in the oil sands in Alberta, Canada.

The company also has over 100 drilling locations for conventional light oil in a new play on its legacy land assets, which Connacher is just beginning to drill. This appears to be a high economic return oil play.

The operating cash flow should go from 6 cents a share per quarter to 8 to 11 cents a quarter, not including any one off items. Down side, Connacher has a lot of debt and shares. If the price of oil declines very significantly, it could have financial problems.

Novus (NOVUF.PK) is mainly involved with the Viking Play in Saskatchewan, Canada. The company is projecting cash flow of $34 million this year and has 167 million shares outstanding. Novus averaged 1525 boe per day average production in the 4th quarter 2010 and is projecting 2011 exit production of 3,000 barrels with 85% oil. The company does not anticipate any new stock issues this year. The cap ex will be generated by cash flow and additional debt. Novus has over 540 drilling locations in the Viking or over 10 years at the current rate of drilling.

Second Wave (SCSZF.PK) is currently producing 2650 Barrels - 60% oil. Most of its recent drilling is at Judy Creek in the Pekisko formation, which is 70% oil. Second Wave just sold $13 million worth of non core assets, which will be used to drill additional wells. The company also recently entered into a farm out agreement with a larger Canadian oil company to drill its Beaverhill Lake property. Second Wave has over 600 Pekisko drilling sites, or over 15 years of drilling at the current rate of development. Second Wave has 90 million shares outstanding.

There are two larger oil companies that pay good dividends, have large land positions in the Bakken and many drilling sites. Neither of these companies will increase in valuation tremendously, but they will pay a good dividend and appreciate in value over time if oil remains in the current range of $80 to $105 in value. These companies are Petrobakken Energy Ltd (PBKEF.PK) - company presentation and Crescent Point Energy (CSCTF.PK) - company presentation. Both companies are beginning pilot, secondary recovery projects on part of their Bakken acreage.


Additional disclosure: I may buy or sell at any time some or all of these companies shares mentioned in this article based on world events or specific news about the company. Also remember that you should not fall in love with any stock and you need to diversify you portfolio. Not all stocks are appropriate for all individuals and you should consult your advisers and brokers before purchasing any stocks for a second or third opinion regarding these stocks.