Oil continues to whipsaw wildly as energy markets react strongly to a mix of good and bad news. While the North American benchmark West Texas Intermediate (WTI) has gained 22% since the start of 2019, many Canadian energy stocks have failed to rally, creating an opportunity to buy quality drillers at a very attractive valuation. Here are three top upstream oil explorers and producers that every investor should consider.
Quality light oil producer
Whitecap Resources (TSX:WCP) has been harshly handled by the market losing 10% despite WTI soaring higher since the start of 2019. This leaves the driller trading at a deep discount of less than half the net asset value (NAV) of its oil reserves of $10.39 per share.
It also sees Whitecap paying a dividend yielding a monster 8%, which is sustainable if WTI averages around US$45 per barrel during 2019 because of the driller’s hedging strategy.
There is very indication that the average WTI price for 2019 will be far higher than this amount, as it’s already averaged almost US$57 since the start of the year.
Sharply weaker oil at the end of 2018 saw Whitecap move to shore up its balance sheet by reducing spending on its drilling and well development program, as well as reduce operating expenses.
The light and medium oil produced by Whitecap is not subject to the same price volatility and discount to WTI as the Canadian heavy crude benchmark known as Western Canadian Select (WCS). That significantly reduces risk for Whitecap and increases its appeal as an investment compared to many of its domestic peers that produce heavy oil.
Leading Colombian driller
Parex Resources (TSX:PXT) owns 2.3 million acres spread across 23 block of oil concessions in the Llanos and Magdalena Basins in Colombia.
It reported some solid results since the start of 2019, including a 22% year-over-year increase in production for the first nine months of 2019 and a notable operating netback of US$36.21, which is one of the highest among upstream oil producers.
What makes Parex a very attractive investment is that the company is trading at a deep 70% discount to its net asset value of $33.80 per share, highlighting the considerable upside on offer.
The driller is also debt free and possesses a fortress balance sheet with US$350 million in cash at the end of the third quarter 2019. That endows Parex with considerable financial flexibility so that it can continue developing its existing oil properties and weather any further collapses in the price of crude, which some pundits are predicting will occur during 2020.
For these reasons, Parex remains a best-in-class investment for investors seeking to profit from higher oil.
Driller with a conventional focus
Intermediate upstream oil producer Surge Energy (TSX:SGY) has seen its value plunge by 35% since the start of 2019, leaving it with a juicy 10% dividend yield. The driller’s dividend and monster yield appears sustainable, with a projected all-in payout ratio of 98% for 2019 if WTI averages US$55 per barrel, which is US$2 per barrel less than the average price as at the end of October.
What makes Surge even more attractive is that even after allowing for debt, leasing and decommissioning liabilities, it has an after-tax net asset value of $3 per share — triple its current market value. That highlights the considerable upside available if crude keeps rallying higher.
Surge also has a history of growing its oil production, which for the third quarter expanded by 18% year over 21,217 barrels of crude daily, positioning it to grow earnings at a steady clip as WTI rises in value.
The driller is also focused on strengthening its balance sheet having reduced net-debt by $84 million since the end of 2019. Surge is an attractive play on higher crude that’s rewarding shareholders with a regular dividend yielding a very juicy 10%.
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Fool contributor Matt Smith has no position in any of the stocks mentioned.