Updated Performance Review For 6 High Yield Canadian Oil And Gas Companies

Includes: BTE, CVE, ENB, ERF, OBE, PGH
by: Zvi Bar

Canada is the largest provider of oil and gas to the United States, and the two nations are generally friendly. Nonetheless, some Canadian oil and gas equities, and possibly the nation itself, may be feeling scorned by the recent U.S. government's denial of the Keystone pipeline. Moreover, natural gas prices within North America have fallen dramatically over the last two years, reaching historical lows within 2012.

The present apparent bottoming process for natural gas and the capacity and trade problems highlighted by the Keystone roadblock has prompted some investors to exit positions in Canadian petroleum equities, and especially those that would be expected to benefit from greater U.S. distribution capacity and higher prices. Pipelines take time to build and alternative plans take time to prepare, so it may take a while for certain capacity issues to be resolved.

Moreover, because the Canadian dollar is primarily backed by the nation's abundant natural resources, and has come under weakness versus the U.S. dollar over the last several quarters, since oil and gold peaked. Recent European instability has further bolstered the U.S. dollar versus most real assets and currencies that rely upon them. Still, the Canadian dollar continues to trade at a historically strong valuation.

Below is a recent performance table for six high yield Canadian oil and gas equities that trade within the United States (listed in alphabetical order): Baytex Energy Corp. (NYSE:BTE), Cenovus Energy Inc. (NYSE:CVE), Enbridge Inc. (NYSE:ENB), Enerplus Corporation (NYSE:ERF), Pengrowth Energy Corporation (NYSE:PGH) and Penn West Petroleum Ltd. (PWE). I have included their one-week, one-month and 2012-to-date equity performance rates, as well as their current yields.

And below is a three-month share performance comparison chart for the six above-mentioned Canadian petroleum producers:

(Click to enlarge)

In the last month, the above-listed equities averaged a decline of 6.9%, and the group now averages a decline of 14.11% since the start of the 2012. The declines have been accelerated, though, with the group averaging an 8.1% decline over the last five trading days. These performance rates do not include dividends paid, which are substantial for several of these companies. These companies all provide above-average dividends compared to the broader market, and an average annualized yield of about 6.85%.

Natural gas prices have trended lower for years, with new technology increasing gas supplies far faster than demand growth for gas. Most Canadian oil and gas equities followed oil and gas price fluctuations, and haven't changed their dividend policies in several quarters. Recent low gas prices have caused some investors to question the sustainability of several of these lofty dividends, especially if oil follows gas lower.

Many may argue that dividend cuts have been priced into several of these equities. The higher dividend payers have been the worst performers within 2012. Several have maintained their current dividend policy for the last two years, with half of the above-listed companies reporting and paying their dividend on a monthly basis.

An additional Canadian pipeline to the U.S. may become a key issue of political debate during the second half of this election year. It is possible that the previously denied Keystone pipeline, or a comparable pipeline compromise, will find approval within the next two quarters.

Over time, it is expected that a growing amount of both oil and gas might find its way to western Canada for export to China, but such transfers take time, and the pipeline build-out can be expensive and slow. It is possible that Canada could supply both China and the U.S., but issues of scale and capacity will have to be resolved.

Disclosure: I am long PGH.

Additional disclosure: Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.

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