Warren Buffett is famous for saying, “Be fearful when others are greedy and greedy when others are fearful.”
It amazes me how many investors know that quote by heart, yet can’t bring themselves to implement it when the time comes. There’s always something that holds them back from loading up on cheap stocks, whether it’s peer pressure, or just being unable to pull the trigger without a rosy consensus.
Right now, when it comes to energy stocks, it’s time to get greedy. We’ve passed the point of a quick rebound and are now settling into a new reality of lower crude prices. How long this will last is anyone’s guess, but the market will turn. The market always turns in the long run.
From looking at their share prices, it’s obvious how most investors are playing this slump. Small producers are down 50%, 75%, and even 90%, while the giants of the sector are barely down double-digits since the summer. Even though the big boys have significant downstream operations, that just doesn’t compute.
It isn’t just as simple as buying some of the more beaten-up small producers. Some of these companies are damaged goods for a reason; they either have higher cost production or debt issues. Most of the really depressed names have both factors working against them.
Among the carnage, there are some solid companies that have struggled just because of their exposure to the sector. Once crude recovers, these stocks will likely soar. Let’s take a closer look at three stocks.
Gran Tierra
Gran Tierra Energy Inc. (TSX:GTE) has two big things in its favour. It has low cost production in Colombia and it has a pristine balance sheet.
In the company’s recently released 2014 annual numbers, it was aided by favourable exchange rates and so reported operating expenses of just $39 per barrel. That means the company can continue production with crude at its current level and still eke out a modest profit.
Gran Tierra was looking to expand operations into Peru, but disappointing drilling results delayed those plans until the price of crude recovers. That means the original $310 million earmarked for capital expenditures in 2015 has been cut drastically to $140 million. Most of that can be funded by cash from operations even if oil doesn’t recover, but the company also has a cash hoard of US$332 million it can always tap if needed. It also has no debt, which is a very nice perk.
Pengrowth Energy
Management of Pengrowth Energy Corp (TSX:PGF)(NYSE:PGH) were on the ball when they hedged the 75% of the company’s 2015 production at $94 per barrel, as well as 61% of 2016’s anticipated production at $89 per barrel.
Plus, the company has cheap production coming online with the Lindbergh project. Lindbergh is cash flow positive at $30 per barrel, and is expected to boost the company’s overall production by approximately 20% as it ramps up throughout 2015.
It also slashed capex extensively from $900 million in 2014 to just a projected $200 million in 2015. Most of this money will be spent on Lindbergh. Both capital expenditures and the company’s $0.02 monthly dividend are expected to be covered from existing cash flows. Once oil recovers and the market stops worrying about post-2016, Pengrowth shares will likely double, or perhaps even more.
Athabasca Oil
Like with Gran Tierra, Athabasca Oil Corp (TSX:ATH) has a great balance sheet and loads of potential.
The company is sitting on some oil sands property with the kind of potential most energy companies can only dream of. It has 4 million acres of property, and some 12 billion barrels of oil in the ground.
The issue is getting that oil out. The company is projected to grow production by 12,000 barrels per day when its Hangingstone project comes online, eventually ramping up production to 50,000 barrels by 2018. But because of the price of oil, Hangingstone is pretty much all the company has going right now.
Once it receives payment from Petrochina for the sale of a joint project in the summer, the company will be sitting on approximately $1 billion in cash, giving it plenty of liquidity until 2017 when a major debt repayment is due. The company also has $2 billion in tax loss carry forwards, which will help once it starts to ramp up capex again.
