In analyzing Canadian High Yield oil and gas stocks, we identify opportunities, given the current bear stock market conditions.
Finding and development costs for Canadian High Yield oil and gas stocks continue to rise; in 2011, they gained roughly 20% to > 20/boe on a 2P basis. We feel that the rise in finding and development costs can be attributed to the yield stocks focusing on oil, given the weak natural gas prices in addition to increased drilling and completions costs.
Peyto (OTCPK:PEYUF) and ARC (OTCPK:AETUF) had the lowest finding and development costs in 2011. Investors must be cautioned that both Peyto and ARC are natural gas weighted companies. Baytex (NYSE:BTE) and Bonterra (OTCPK:BNEFF) achieved strong capital efficiency numbers and had high netbacks, as their development programs in 2011 were almost all focused on oil.
Arc Resources (OTCPK:AETUF)
Arc Energy Trust was created in 1996 as an open-ended royalty trust through the acquisition of properties from Mobil Oil. ARC's asset portfolio consists of long-term growth projects, including its Montney resource development at Dawson in NE BC and Ante Creek in Northern Alberta. While Montney gas continues to be the stock's primary source of growth, it has shifted its focus to oil and liquids rich opportunities.
Condensate and NGLs make up approximately 35% of ARC Resources's total production volumes. ARC Resources continues to rank in the top decile in FD&A costs and has generated a 2.2x recycle ratio over the past three years. With a current yield of ~ 6% and natural gas prices nearing bottom, ARC is a buy in today's market conditions.
Baytex Energy (BTE)
Baytex Energy Trust was created in September 2003 through a reorganization of Baytex Energy Ltd.. With over 60% of this stock's production weighted towards heavy oil, the company remains exposed to the continued volatility in heavy oil differentials. Baytex does own a large land base in the Bakken and Three Forks play in North Dakota.
Baytex continues to be focused on organic heavy oil growth at Seal and looks to potentially increase its dividend later in the year. Baytex maintains a strong balance sheet of 0.5x debt to cash flow and an all-in payout ratio of 105%. With is production weighted towards oil, a strong balance sheet and a yield of ~ 6.5% with some upside, we feel Baytex is a strong buy.
Enerplus Corp (NYSE:ERF)
Enerplus was created in 1986 and was originally part of a group of royalty trusts managed under the Enerplus group of companies. Enerplus continues to concentrate on its Bakken oil properties and Marcellus gas assets. Of Enerplus's $800 million 2012 budget, $300 million is going to the Bakken and $190 million to holding mineral rights in the Marcellus.
As financial flexibility is tight due to the current natural gas pricing environment, the company has slashed its dividend by 50%. Enerplus has accumulated land at Willesden Green, which it feels is prospective for Duvernay. Given the current gas prices and the recent reduction in its dividend, we feel this stock is a hold.
Pengrowth Energy Trust was created in December 1988 and transitioned into a dividend paying corporation at the end of 2010. In May 2012, Pengrowth completed the acquisition of NAL Energy. The acquisition provides Pengrowth with scale and improved liquidity, despite limited common working interests in assets.
Pengrowth's balance sheet improves and maintains its strategy to grow its oil sands portfolio. With a current yield nearing 12%, this is an attractive stock. However, we feel a dividend cut is on the horizon in order to maintain a sustainable business model.
Additional information of value to investors investing in oil stocks trading on the North American stock markets are the drilling results and related production information for the various high yield oil and gas stocks. To view this data see Oil Stocks Western Canadian Drilling Results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.