Mason Granger, Portfolio Manager, Sentry Investments

FOCUS: Canadian Energy Stocks

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MARKET OUTLOOK:

Since November 2014, OPEC and Saudi Arabia has largely abandoned their traditional role in stabilizing the oil price. Instead, oil markets have had a slower period of adjustment in which traditional market forces of supply and demand and the price level that balances the market and drives out investment in higher cost sources. The low commodity price environment has led to hundreds of billions of dollars in global capital expenditure cuts by oil & gas explorers and producers. The U.S., which had been the principal source of non-OPEC supply growth, has seen a 78 per cent decline in oil directed drilling since the fall of 2014. Given the financial conditions of most North American companies, we do not expect rig activity to increase materially until we see a sustained move in oil above $50 per barrel. We expect oil prices to continue to rise through the balance of the year as the markets move into balance; however we expect ongoing volatility as investors remain skittish about Iranian output potential, Iran/Saudi relations and global demand in addition to other geopolitical/economic factors.

We are becoming cautiously optimistic on the short to medium term outlook for the U.S. natural gas markets. Longer term, significant gas growth in the U.S. north east from prolific and highly economic gas plays like the Marcellus also continues to aggressively compete for traditional Canadian end markets.  Domestically, rapidly-growing gas supplies from the Deep Basin and Montney appear to be overtaking gas transmission capacity within Canada and are likely to continue to exacerbate volatility around the differential between Canadian and U.S. benchmark pricing. We are encouraged by growing exports to Mexico and power generation demand, however, the picture for liquefied natural gas exports continues to disappoint. This is especially true in Canada where LNG development seems to have faltered with delays final investment decisions in a shrinking pool of viable LNG contenders.

Top Picks:

Whitecap Resources (WCP.TO), Cost base of $9.81/share, last purchase on April 15, 2016 at $8.57/share

Whitecap Resources Inc. is an oil-weighted E&P with four main core areas in northwest Alberta, central Alberta, and southern Saskatchewan targeting oil. We believe that Whitecap is a blueprint for the successful transition to the dividend-paying intermediate model, owing to the company’s sound operational execution, well-focused acquisitions in quality resource plays, and the associated management of its decline rates. We believe the company is among the best positioned dividend companies to persevere through the softer crude pricing environment and emerging as a stronger company when commodity prices recover.

Parex Resources (PXT.TO), Cost base of $6.80/share, last purchase on March 30, 2015 at $8.18/share

Parex Resources remains the best-in-class international exploration and production company focused on developing oil in Colombia’s Llanos Basin. The company has grown from a single discovery at it Kona field to a production level approaching 30,000 barrels per day of oil from consistent exploration success which has been exceptional. Optimizing production from a diverse portfolio has enabled Parex to extend the reserve life to over 7 years. The company plans to drill up 13 exploration and development wells in 2016 and total capex is expected to be funded with cash flow based on a US$45 per barrel Brent crude oil price. The company is able to crow within cash flow and retain a debt-free balance sheet.

Granite Oil (GXO.TO), Cost base of $7.37/share, last purchase on June 29, 2016 at $7.51/share

Granite Oil Corp. is a junior, dividend-paying producer focused on pure-play development of the Bakken in southern Alberta. The company was formed in May 2015 through the reorganization of DeeThree Exploration Ltd. The predecessor company discovered the Alberta Bakken in 2011 and has since delineated over 80 sections of land. Due to the unique characteristics of the oil pool, the reservoir is well-suited to a gas injection secondary recovery scheme. We believe Granite’s valuation is attractive in the context of sustainability and we note that the company is the few companies that has not had to cut its dividend through this challenging period in the energy sector and pays a compelling yield of 5.5 per cent.

Past Picks:  March 17, 2016

Secure Energy Services (SES.TO)

• Then: $8.94
• Now: $8.81
• Return: -1.45%
• TR: -0.55%

Spartan Energy (SPE.TO)

• Then: $2.76
• Now: $3.49
• Return: +26.45%
• TR: +26.45%

Whitecap Resources (WCP.TO)

• Then: $8.57
• Now: $9.84
• Return: +14.82%
• TR: +16.20%

Total Return Average: +14.03%

Fund Profile

Sentry Energy Fund

Performance as of: July 20, 2016

* S&P/TSX Capped Energy Index  Returns net fees & distribution

"Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return is are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.”

Top Holdings

Twitter: @SentryInvest

Website: www.sentry.ca