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Canadian Billionaire Investor Seymour Schulich’s Bets on Oil

Canadian billionaire investor Seymour Schulich, through The Schulich Foundation, announced in August that he purchased another two million shares of Pengrowth Energy Corp. (TSX:PGF)(NYSE:PGH), increasing his stake to 18.6% of the energy company.

He has also been adding to his share of Birchcliff Energy Ltd. (TSX:BIR). In July, he acquired an additional three million shares, totaling about 45 million shares, or 30% of the company. These two stocks have returned over 100% year-to-date, outpacing the S&P/TSX energy index, which has gained about 20% over the same period.

Why Pengrowth Energy?

Pengrowth Energy has some of the top-producing conventional and oil sands assets in Alberta and over $11 billion in potential development opportunities. However, the collapse in oil prices, the company’s insurmountable debt, and consecutive earnings misses pushed the stock to all-time lows in early 2016.

The company also suspended its dividend in 2016 to free up about $22 million in annual savings. The stock hit its 52-week low of $0.66 per share in early January and has since climbed to about $2.10 per share. In its latest corporate presentation, titled “Survive to Thrive,” management stated that its focus for the near term is on improving the company’s balance sheet through various cost- and debt-reduction strategies.

The company has $640 million in debt maturing in 2017, which it expects to repay using excess cash from operations, $300 million worth of dispositions, and the remaining drawn from its credit facility.

On a more positive note, the company’s risk-management program has been successful at sheltering some of its funds from operation (FFO) from the 70% decline in commodity prices.

The company has been able to mitigate about 40% of potential declines in FFO due to the falling oil price. It hedged about 82% of its production in 2016 at $83 per barrel and 96% of its natural gas at $3.26 per million cubic feet. In addition, the company has been able to reduce its operating costs by 12% to approximately $13.50 a barrel, which has improved its operating margins.

Why Birchcliff Energy?

Birchcliff Energy is one of the best-performing energy stocks in Canada with a compounded annual production growth rate of 30% since 2005. In Q2 2016, the company reported a modest 3% increase in production and a 70% decline in its funds from operations, primarily attributed to low commodity prices.

However, it has taken steps to reduce its operating costs by 24%, which are already some of the lowest in the industry. It also increased its capital expenditures in 2016 by 40% to $145 million, which will be focused in the Peace River area of Alberta.

In June, the company announced that it agreed to purchase Encana Corporation’s Gordondale assets. To fund the acquisition, Birchcliff Energy issued $690.8 million in shares, fully subscribed by a syndicated of lenders, that included $18.8 million in stock allocated to Schulich in a private placement.

As a result of the acquisition, the corporation has increased its annual average production guidance for 2016 by 25%. It also changed the company’s commodity supply mix from approximately 88% natural gas, 8% light oil, and 4% natural gas liquids (NGLs) to 77% natural gas, 10% light oil, and 13% NGLs.

Conclusion

Growth investors in the energy sector concerned about the near term should examine each company’s strategy for 2016 and 2017. Pengrowth Energy has over 30% of its debt maturing in 2017 and has indicated that any excess cash will be allocated to reducing this debt. The company has top-tier assets, but capital expenditure attributed to growth, which is down 86% this year, will come secondary to paying down debt.

On the other hand, Birchcliff Energy is increasing its capital expenditures in 2016 by 40%, taking advantage of a lower-cost environment. The Gordondale acquisition includes 992 potential drilling sites, which gives the company more options to employ its capital. It also adds a significant amount of liquids production with a relatively low base-production decline rate of approximately 20%, giving management more flexibility to increase company cash flows.

 

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Fool contributor Scott Brandt has no position in any stocks mentioned.

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