To many portfolio managers, the energy equities market may seem oversold. But in the view of several leading North American buysiders, those investors may be selling themselves, and their funds, short-particularly when it comes to Canadian energy stocks. Christopher W. (Kit) Smith, senior vice president, U.S. equities, for <$iGE Investment Corp. > in Stamford, Connecticut, says value opportunities remain across the board in energy. "That's because commodity prices are going to stay stronger for longer than conventional wisdom suggests-$26.50 and $23.50 for West Texas Intermediate (WTI) this year and next, respectively, and an average $5 and slightly lower for gas for 2001 and 2002." The big interest will be in gas stocks, says Smith. "As energy convergence companies bring on additional power plants, they're going to need more natural gas. That's why <$iCalpine > just bought <$iEncal Energy > and why <$iWilliams Cos. > just bought <$iBarrett Resources >. Also, oil-service stocks look attractive, because a lot of drilling is needed during the next few years." G. Bryan Dutt, president of <$iIronman Energy Capital LLC > in Houston, has a different perspective. "We see natural gas stocks as overbought and service stocks as fairly valued, with the possible exception of Trican Well Service, a Canadian pressure pumping company. The stocks that aren't overbought and are attractively valued are those with an oily orientation, such as <$iVintage Petroleum >, <$iNuevo Energy > and <$iBaytex Energy. >" Ernst H. Von Metzsch, a partner at <$iWellington Management Co. > in Boston, believes there are many more good stock values within the Canadian patch. "A number of senior Toronto-traded producers like <$iCanadian Natural Resources > (CNQ) and <$iTalisman Energy > (TLM) are still selling at attractive prices versus what you'd pay for like-size producers in the U.S. The same holds true for intermediate Canadian producers like <$iRio Alto Exploration > (RAX) and drillers like <$iPrecision Drilling > (PD) and <$iBonus Resource Services > (BOU)." Garey Aitken, vice president and portfolio manager for <$iBissett Investment Management > in Calgary, says the most upside is in Canadian integrateds like <$iPetro-Canada > (PCA) and, to a lesser extent, Suncor (SU). "With their downstream operations, they're better positioned for the later stages of this commodity-price rally; also, they have attractive upstream growth opportunities." Within the Canadian service sector, Aitken sees buying opportunities among the later-cycle plays. "ShawCor (SCL.A), involved in pipe-coating, is going to benefit greatly as pipelines are constructed globally during the next few years." Martin Ferguson, a partner and portfolio manager at <$iMawer Investment Management > in Calgary, says, "Besides Shawcor, focus on <$iEnerflex Systems > (EFX), a gas compression equipment company; <$iAltaGas Services > (ALA), which owns gas processing plants throughout Alberta; and <$iCHC Helicopters > (FLY.A), operating mostly in the North Sea." Among undervalued Canadian E&P companies, Ferguson lists <$iZargon Oil and Gas > (ZAR) and <$iCourage Energy Inc. > (CEO), a high-impact natural gas explorationist in Alberta and British Columbia. Says J. Denis Mote, a partner at <$iMaison Placements Canada Inc. > in Toronto, "If you believe $25 oil and C$6.50 gas are here to stay, then all Canadian oil and gas stocks look pretty cheap right now." He notes Talisman is trading at 2.5 times 2001 cash flow; Rio Alto, 2.7; <$iCompton Petroleum > (CMT), 2.8; and <$iVelvet Exploration > (VLV), 2.3. Also, <$iAlberta Energy Corp. > (AEC), <$iPanCanadian Energy > (PCP) and <$iAnderson Exploration > (AXL) are selling at about three times 2001 cash flow versus historic averages of 4.5 to 5 times cash flow. Why the low valuations? "Many people think oil prices are going to retreat to $18 to $20 and Canadian gas prices will slide to C$3," says Mote. "I can't see that. Canadian gas won't go lower than C$5 and WTI crude, no lower than $25." Martin Anstee, senior investment officer at <$iMaxxum Fund Management > in Toronto, also believes there's plenty of value left in Canadian E&P companies "because you have the added attraction of takeovers." Two senior producers that have lagged the market recently, he says, are Nexen Inc. (NXY), trading at 2.8 times 2001 cash flow, and Canadian Natural Resources, at 2.5. Among undervalued Canadian junior producers, Anstee counts gas-leveraged <$iCompton Petroleum > and <$iVentus Energy > (VTU), trading at 2.7 times 2001 cash flow.
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