Why Oils Are Strong Bets For 2018 Gains

Dec. 04, 2017 1:38 PM ETOBE, BIREF, BTEGF, BNEFF, CPG, SPGYF9 Comments
Michael Blair profile picture
Michael Blair
5.72K Followers

Summary

  • Oil prices rising while inventories fall.
  • IEA forecasts overly bullish on production.
  • MIT study suggests shortages loom.

A study by MIT concludes IEA forecasts of U.S. supply are overly bullish, erring by overestimating the productivity of "fracking" while underestimating the decline rate of resulting wells. If MIT is right, oil prices should rise.

For several months, world oil inventories have been falling in large part a result of the OPEC decision to cut production. Today, many exploration and production companies are trading at historical lows despite growing productions and cash flows. Among those are Birchcliff (OTCPK:BIREF); Baytex (BTE); Obsidian (OBE); Bonterra (OTCPK:BNEFF); Crescent Point (CPG) and Whitecap (OTCPK:SPGYF). These names offer substantial opportunity for outsized gains and some income.

Birchcliff is primarily a natural gas producer but its oil and liquids output is substantial at about 13,500 barrels a day. Investors often ignore Birchcliff's oil production. At less than $4 per share, Birchcliff trades at less than half its 52 week high and is a candidate to double over the next two or three years.

Baytex has suffered even more, falling from over $40 per share only a couple of years ago to less than $4 per share today. Baytex carries a large debt load but that appears manageable while the company has very high torque to higher oil prices. If Baytex can manage its debt load, I see no barrier to a recovery in stock price to more than $20.

Bonterra has fallen from $45 per share in 2015 to $12 per share today. Bonterra pays a healthy dividend and offers unhedged leverage to higher oil prices. Bonterra is well managed and lives within its cash flows. Bonterra stock has a reasonable chance of doubling within three years.

Crescent Point was the darling of the Canadian oil patch for years but is out of favor today. This stock traded over $40 per share in recent years and now trades at less than $8 per share. I believe we will see Crescent Point stock north of $20 per share within 3 years.

Whitecap is a low cost producer with solid production growth, but its stock has fallen by half in just two years. With a 4% dividend and sold economics, this stock should be a foundation of any oil & gas portfolio and is a steal at its current $7 per share price.

I have spent some ink describing how poorly these stocks have performed since 2014. I agree with market analysis done by Nobel prize winning economist Richard Thaler that outsized returns that best the market are available by investing in stocks which have done poorly over the past few years but otherwise have economics that compare favorably to their peers. These stocks meet those criteria.

Space does not permit a detailed review of Thaler's groundbreaking work but recommend investors read his recent work on behavioral economics entitled "Misbehaving". Richard Thaler has demonstrated that the efficient market hypothesis has weaknesses and that investors do not always act in ways consistent with their own interests, over reacting to short term news. Smart investors will pay attention.

I am long each of the names listed in this post.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

Michael Blair profile picture
5.72K Followers
I retired as CEO of an Automotive Parts supplier, and manage an investment portfolio for myself and family. I have a BA in History from Royal Military College of Canada and an MBA from the University of Western Ontario. I have a graduate certificate in Advanced Valuation from NYU and graduate Diploma in Mining Law, Finance and Sustainability from Western University. My first career was as a fighter pilot in the RCAF, and, following my MBA I joined McKinsey & Company, Inc. leaving them for Canadian GE. I left CGE as a Vice President in 1984 and founded The Enfield Corporation Limited ("Enfield") which grew from 243 employees in 1984 to over 10,000 in 1989 when Enfield was taken over and I was replaced as CEO. In 1989, I acquired control of Algonquin Mercantile Corporation, renamed Automodular Corporation in the late 1990's when I turned it to focus exclusively on automotive parts sub-assembly. Along the way, Algonquin turned a few ageing drug stores into Pharmx Rexall Drug Stores Ltd., sold to Katz group in 1997 and today a major Canadian drug store chain. I have been a private investor since 1971 both directly and through a private company controlled by myself and members of my family.
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Disclosure: I am/we are long OBE, BTE, BNEFF, SPGYF, BIREF. 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.

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