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Canadian equities roundtable: Part II

Energy stocks that the managers expect will stoke their returns

Sonita Horvitch 19 January, 2011 | 7:00PM
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Editor's note: The discussion turns to energy stocks in today's part two of Morningstar's Canadian equity manager roundtable. Our four panelists: Ted Macklin, managing director, Canadian equities, at Guardian Capital LP; Martin Hubbes, executive vice-president and chief investment officer at AGF Investments Inc.; Daniel Bubis, president, chief investment officer and founder of Winnipeg-based Tetrem Capital Management Ltd., and manager of CI Canadian Investment  ; and Suzann Pennington, senior vice-president and leader of the Saxon Group's all-cap Canadian equity and balanced team at Mackenzie Investments. They spoke with Morningstar columnist Sonita Horvitch, whose three part-series began on Monday and concludes on Friday.

Q: Let's talk about the outlook for energy. At the end of 2010, energy stocks represented 27% of the S&P/TSX Composite Index.

Bubis: If the United States' economic activity starts to pick up, this will be good for oil and oil stocks. Suncor Energy Inc. SU, for example, is still a long way off its all-time highs.

Macklin: It is my biggest energy weighting in BMO Guardian Large Cap Canadian Equity. It is a growth stock. I am a growth-at-a-reasonable-price manager.

Pennington: I own Suncor in Mackenzie Saxon Stock. It is a value stock. I am a value manager. We all own Suncor around this table.

Bubis: It is a value and a growth stock. That is a sweet spot. Global demand for oil in 2011 is projected to exceed the peak demand for oil that we had in 2007 by 2%. The secular case for commodities is real.

Hubbes: The underlying demand is there. Supply is constrained right now. Those two factors don't mean that every moose pasture in Northern Ontario is a mine. The equity market is pricing everything as if all the exploration projects will come into production. Longer term, investors will need to be more discerning. If you stick to quality names, you should be all right. An example is Potash Corp. of Saskatchewan POT. It is a world-class deposit. If you get the stock at the right price, you will be fine.

 
Ted Macklin

Macklin: I prefer oil to natural gas. I've been trying to warm up to natural gas for some time. There are new technologies for shale gas, which have altered the economics of a lot of players. There has been a lot of downward pressure on the price of natural gas. Longer term, natural gas should do well, but the timing is getting pushed out. Where I do have exposure to natural gas, I prefer shale plays. An example is Encana Corp. ECA. I am focusing primarily on oil-sands exposure in my energy holdings.

Bubis: It is the natural place to be.

Hubbes: They have long-life reserves and if you are bullish on oil, it is the place to be.

Pennington: If you have a longer-term investment horizon, this is the place to be.

Macklin: Companies that I am focusing on are Suncor, Cenovus Energy Inc. CVE and Canadian Natural Resources Ltd. CNQ. They have been long-standing holdings.

Hubbes: I have a similar view to Ted. Oil is much more of a global commodity, and if you are bullish on global growth, it makes you optimistic about its prospects. My biggest position in AGF Canadian Stock is Suncor at almost 6% of the fund. I like the assets and the management team. The stock is undervalued relative to other plays in the Canadian market. My second biggest energy position is Talisman Energy Inc. TLM, which is both oil and natural gas. Management is redefining this company. I also hold Cenovus and Canadian Natural Resources Ltd.

Bubis: I will take a contrarian view on natural gas.

 
Daniel Bubis

Macklin: He's right, but he is early.

Bubis: The price of natural gas to the price of oil, on an energy-equivalent basis, is historically wide. There has been a huge natural-gas supply response because of the technology change. It's a long-term demand story with growing use of natural gas for electricity generation and in transportation. As a value investor, I am able to buy natural-gas resources very inexpensively. Encana makes a lot of sense and Talisman gives you a lot of exposure.

There is a company that came public recently, Tourmaline Oil Corp. TOU, which has about a $3-billion market capitalization. For a value manager, Tourmaline is a bit of a growth story. It's inexpensive because it's more tied to natural gas. I also like oil a lot too. The one name I would add to the mix, talking about large-cap, high-quality companies, is Imperial Oil Ltd. IMO. We have owned it for years. Like Suncor, our biggest energy name, it was a laggard in 2010.

Pennington: Oil is the easier call. There are still some good, cheap oil stocks. We talked about Suncor and Canadian Natural Resources. I sold Cenovus recently on the move up. We have been weighted toward the oil sands for some time. More recently, I have been warming up to natural gas. The downside in the price is limited. We sold Cenovus to go into ARC Energy Trust AET.UN (which is converting to a corporation, ARC Resources Ltd.), where we got more natural-gas exposure, and we added more to Suncor.

Q: Energy-services stocks?

Macklin: I don't have any. They are not in the large-cap space.

Hubbes: I own ShawCor Ltd. SCL.A. I also own Ensign Energy Services Inc. ESI. This stock has lagged. It is not a big holding for me. I have held the stock for a long time. I like the management. It is a longer-term play.

 
Suzann Pennington

Bubis: The energy-services companies that have done well in 2010 are the fraccing companies. We own Trican Well Service Ltd. TCW and Calfrac Well Services Ltd. CFW. They are not the deep-value plays that they were, and we have been gradually taking profits into the rally. The drillers have been challenging. We own Precision Drilling Corp. PD and Savanna Energy Services Corp. SVY.

Pennington: I own Savanna.

Bubis: Savanna, which trades below book value, is one of the deep-value plays. The drillers are typically correlated to gas prices, and these were down more than 20% in 2010 and bucked the trend in commodities. Yet, Precision ended up having a pretty good year. It is typically correlated to natural gas.

Pennington: Savanna is a good way to play natural gas. I have a fair, but diversified, exposure to energy services. I also own ShawCor and have for a while, which is a pipe-coating company. Another holding is Flint Energy Services Ltd. FES, which is heavily involved in oil-sands construction.

Bubis: Another name that I own is Mullen Group Ltd. MTL. Its biggest division is Canadian Dewatering L.P., which addresses the environmental issues of the oil sands. Mullen is the biggest player in the cleaning up of the tailing ponds.

Q: Let's talk about uranium.

Macklin: Where permitted by my mandates, I am long on Cameco Corp. CCO. It struggled for a long time with the flooding in the Cigar Lake mine, but that is back on track. Cameco has long-life reserve assets. Longer term, the world, particularly developing economies, will continue to have a large appetite for energy. Short term, the stock has had a big spike.

Hubbes: I own Cameco and like it. Clean energy is going to be a huge issue. China is building a large number of nuclear reactors. Again, Cameco is a world-class, low-cost, long-life reserve.

Pennington: I don't own any uranium.

Bubis: I own Cameco. We bought the stock when it was really cheap. It has had a good run. If you believe in higher energy prices, uranium is in this basket. Cameco is consistent with our theme at this roundtable of focusing on larger-cap, more established companies with the reserves.

Photos: paullawrencephotography.com

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Sonita Horvitch

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