Since November 2014, OPEC and Saudi Arabia have largely abandoned their traditional role in stabilizing the oil price.  Instead, oversupplied 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 has had to drive out investment in higher cost sources.  The low oil price environment has led to hundreds of billions of dollars in global capital expenditure cuts. The U.S., which had been the principal source of non-OPEC supply growth, has seen a 76% decline in oil directed drilling since the fall of 2014.  We anticipate that with the end of a seasonal period of lower demand for refinery maintenance that occurs in March/April, we should have better visibility towards a tightening of global oil balances in the second half.  The normal period of Q3 global demand is typically significantly higher and these increases will be coming at a time when a very rapid reduction in U.S. oil directed drilling activity in the U.S. should meaningfully impact production.  As always, the geopolitics of the Middle East and other volatile regions is the wildcard in terms of the oil price direction.  OPEC and other key producers are expected to meet in Qatar in April to discuss freezing production but an agreement is doubtful with a post sanctions Iran so focused on increasing its exports. The natural gas picture in North American continues to be challenged. Inventory levels in the U.S. and Canada remain elevated as a result of excessive supply growth and an El Niño driven mild winter.  Significant gas growth in the U.S. northeast 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 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:

Secure Energy Services (SES.TO) 

Cost base of $14.10 a share

Last purchase on December 11, 2015 at $6.86 a share

Secure Energy Services is Canada’s 3rd largest oil processing & recovery firm and has recently expanded into the drilling fluids business.  Secure operates 39 facilities which we estimate processes around 19% of Canada’s hydrocarbon production, while also providing drilling fluid services to a third of the drilling rigs in Canada.  We believe that Secure has the capacity to more than triple its business through organically generated cash flow over the next five years.  The current distressed environment creates acquisition opportunities that could materially expand Secure’s footprint in short order and at accretive valuations.  Secure remains one of the very few logical or credible buyers of facilities.  We have a level of comfort in Secure’s 2.8% dividend payout as well as its balance sheet which we believe is well positioned to survive and thrive in the downturn.

Whitecap Resources (WCP.TO)

Cost base of $10.16 a share

Last purchase on February 23, 2016 at $6.90 a 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.

Spartan Energy (SPE.TO)

Cost base of $2.84 a share

Last purchase on February 25, 2016 at $2.4 a 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 2016, 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.  Spartan is well positioned participate in attractive acquisition opportunities as 2016 unfolds based on its strong balance sheet position and supportive capital markets.

Past Picks: Apr. 2, 2015

PrairieSky Royalty (PSK.TO)

Parex Resources (PXT.TO)

Spartan Energy (SPE.TO)

Total Return Average : +4.17%