Pullback in Commodities Threatens Junior Oil and Gas Sector

by: FP Trading Desk

Scotia Capital says the junior oil and gas sector is under threat from a pullback in commodities prices, leading the research firm to reconsider its forecasts for several companies.

“We continue to like NuVista Energy Ltd. (OTCPK:NUVSF), Iteration Energy Ltd. (OTC:ITXFF) and Rock Energy Inc. [TSX:RE],” analyst George Toriola said in a note released Tuesday, noting that enterprise value/cash flow multiples are less than the group average of 5.6x. For Iteration in particular, he notes Iteration will likely run out of room in its C$275-million credit facility but will trim its capital spending program. “We believe the course of action is prudent,” he said.

However, Mr. Toriola is nervous about ProEx Energy (OTC:PXEYF) and Storm Exploration Inc. [TSX:SEO] because of their increased risk from net debt to trailing cash flow of 1.4 times and 2.3 times respectively, due to high natural gas leverages.

Mr. Toriola also suggests investors steer clear of Anderson Energy [TSX:AXL] and Twin Butte Energy Ltd. (OTC:TBTEF) as both companies carry even riskier net debt to trailing cash flows of 1.7x/3.4x and 1.6x/2.5x.

As well, Scotia Capital is predicting Q4 2008 prices of $90 per barrel of crude oil and $7 per million British thermal units will drop to C$85 per bbl and C$6.50 per mmbtu in 2009.