Mason Granger, portfolio manager at Sentry Investments

Focus: Oil and gas stocks
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MARKET OUTLOOK
On November 30, OPEC once again surprised the oil market by agreeing to cut its collective output down to 32.5 million barrels per day, a cut of about 1.2 million barrels from October levels. The cut is effective January 1, 2017 and the first cut from the cartel in 8 years. Certain non-OPEC members, the largest of which is Russia, have agreed to another 600,000 barrels per day of additional cuts.  We believe that this has accelerated the realization of a more balanced oil market and the drawdown of high global inventories. The low commodity price environment of the last two years 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 70 per cent decline in oil directed drilling since the fall of 2014. We expect oil prices to continue to rise through the balance of the year and beyond into 2017 as underinvestment will contribute to tight supply. The North American oil industry which has reinvented itself with a significantly more competitive cost structure stands be a key benefactor of tighter oil markets and stronger expected prices going forward.

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 it is 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 INC. (WCP.TO)
Cost base of $9.86/share, last purchase on October 28, 2016 at $10.72/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 benefit from the recovery in crude pricing environment and emerging as a stronger company when commodity prices recover.

BIRCHCLIFF ENERGY LTD. (BIR.TO)
Cost base of $9.16, last purchase on October 28, 2016 at $8.54/share
Birchcliff Energy Ltd. y is a premium gas-levered exploration and production company with a significant Montney natural gas project at Pouce Coupe/Gordondale, Alberta that is funded by a light oil cash flow engine at Worsley, Alberta. The company's current productive capacity is approximately 65,000 boe/d, while it is expected that production should grow to >80,000 boe/d by year-end 2017. The company has a fully funded five-year plan that could deliver compound annual growth of 20 per cent or more underpinned by long-term firm pipeline service commitments for its growing natural gas volumes.

SPARTAN ENERGY CORP. (SPE.TO)
Cost base of $2.88/share, last purchase on October 26, 2016 at $3.25/share
Spartan Oil Corp. is the third iteration of ‘Spartan’ by a management team that has established themselves as highly disciplined and proven value creators in Calgary. The company is a light oil-focused producer primarily in Saskatchewan with a strategy hinged on sustainable growth through a combination of accretive acquisitions and organic additions via the drill-bit.  Looking to 2017, Spartan has torque to rebounding crude benchmarks; lack of hedges and its oil-weighted production mix make it an attractive investment option, without investing in higher risk, more leveraged names. The company’s recent $700 million acquisition of southeast Saskatchewan assets from ARC Resources has materially reduced its decline profile and has propelled Spartan to a size that should broaden its audience of potential institutional shareholders.
 

PAST PICKS: JULY 21, 2016

WHITECAP RESOURCES (WCP.TO)

• Then: $9.84
• Now: $11.96
• Return: +21.54%
• TR: +22.92%

PAREX RESOURCES (PXT.TO)

• Then: $13.17
• Now: $17.23
• Return: +30.82%
• TR: +30.82%

GRANITE OIL (GXO.TO)

• Then: $7.62
• Now: $5.64
• Return: -25.98%
• TR: -23.74%

TOTAL RETURN AVERAGE: +10.00%
 

FUND PROFILE: SENTRY ENERGY FUND

PERFORMANCE AS OF: DECEMBER 5, 2016

• 1 Year: Fund +25.87%, Index* +34.70%
• 3 Year: Fund -6.31%, Index* -3.27%
• 5 Year: Fund -4.17%, Index* -1.16%

* Index: S&P/TSX Capped Energy Index
* REINVESTED DIVIDENDS/NET OF FEES

TOP HOLDINGS AND WEIGHTINGS

1. PAREX RESOURCES INC.: 5.15%
2. CRESCENT POINT ENERGY CORP.: 5.09%
3. BONTERRA OIL & GAS LTD.: 5.00%
4. ARC RESOURCES LTD.: 4.99%
5. SPARTAN ENERGY CORP.: 4.88%

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.

TWITTER: @SENTRYINVEST
WEBSITE: http://sentry.ca/