While crude-oil prices have surged this spring to around US$86 a barrel, Jennifer K. Stevenson is counting less on further robust price hikes and more on firms with production growth. "We have an oil focus, and it's not reliant on the price going up. If oil hangs in the US$70-80 range, these companies can produce the growth that we expect."
Stevenson, who is manager of the $34-millionQwest Energy Canadian Resource Class, takes a blended approach to picking stocks in the oil patch. After determining the outlook for the underlying commodities, and developing a price forecast, she selects companies that offer the best growth potential.
"We're looking for valuation versus growth, to get the best value, and best growth profile. There's a bit of give and take," says Stevenson, Calgary-based executive vice-president, Qwest Investment Fund Management Ltd. "Our call on natural gas is quite negative, so we don't have gas in the portfolio."
A 24-year veteran of the energy sector, Stevenson examines drilling and production data from oil and gas companies in North America, and compares it with broader industry data. "It's fundamental analysis, looking at data from producers, the U.S. government, and sell-side analysts. Then we develop our own view, looking out 12 months."
Besides analyzing valuation, Stevenson gauges management and corporate governance, as well as the company's land positions, operating costs, profits and success in reinvesting the cash flow to expand production. Generally, she is looking for growth of 15% or more.
One representative holding is Emerge Oil & Gas Inc. EME. "It's a heavy-oil story, and the valuation at the $4 level is very reasonable, given its 30% growth," says Stevenson. "The risk is spread over a large number of wells. They can keep punching holes in the ground, and grow their production by a third."
Emerge is producing 5,000 barrels a day, and could raise that to 7,000 by year-end. Stevenson estimates that the stock is trading at 4.6 times cash flow, based on oil at US$70. "That's a very attractive valuation for a company with that kind of growth profile. When you layer on the low-risk nature of its growth, it's a beautiful thing."
Stevenson does not set price targets and prefers to assess each situation on its own merits. Single positions are limited to about 7.5%. Turnover has been moderate at 46.7% in 2009.
About half of the fund, which is in the Miscellaneous category, consists of tax-sheltered flow-throughs or limited partnerships. "As we roll them in, we've pared them down to the names we want to keep," says Stevenson. She adds that the flow-through names tend to have faster growth profiles than established producers.
A Vancouver native who grew up in Calgary, Stevenson got her start in 1986 with a summer job at Petro-Canada, where she worked in retail gasoline marketing. In another summer job, she was involved in the natural-gas-liquids upstream business at Amoco Canada Inc.
After graduating in 1990 with a bachelor of commerce degree from the University of Calgary, Stevenson worked for about a year at Petro-Canada and then re-joined Amoco. She completed the first year of an MBA program at the University of Alberta in 1991, and landed a summer job at Wilson Mackie & Co., handling oil and gas property acquisitions and dispositions primarily for Petro-Canada.
Stevenson received her MBA in 1993, and joined First Energy Capital, an investment banker that specialized in the energy sector. In 1997, she went to Midland Walwyn, where she worked in corporate finance. The following year, she moved to Dundee Securities Inc. and ran the oil and gas corporate finance department.
In 2003, Stevenson joined QE Funds Corp., a firm that focused on flow-throughs and limited partnerships. The Qwest fund was introduced in March 2006 as a vehicle to create liquidity for flow-through investors.
The fund had a shaky start, and matters were exacerbated in 2008, when commodity prices collapsed and the fund lost 40.4%. "We were caught off guard by how much it (the oil price) went down," Stevenson recalls. "We didn't capitulate when it got very low, because at that point we believed it could not stay there. It's come back strongly, and the outlook is good."
As oil prices have staged a rapid recovery, the fund has rebounded. It returned 61.5% for the 12 months ended March 31.
Given the focus on oil, Stevenson likes names like Gran Tierra Energy Inc. GTE, which she first acquired in 2008. "We have a company with $100 million in cash, and a producing field in Colombia, which spits out another $140 million in cash flow," she says. The stock is around $6 today, or 4.6 times cash flow.
Gran Tierra has an exploration program in Colombia and Peru, although the results are not conclusive, so far. "However, we're paying a reasonable multiple for the growth profile and getting exposure to the exploration upside."
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