Dean Prodan seeks oil and gas companies with strong management, operational momentum, and whose stocks are trading at attractively low prices. "Management doesn't need to have been always successful, but it helps if it has done a decent job," says the 40-year-old vice-president at Calgary-based Crescent Capital Corp., and manager of the $33.2-millionDominion Equity Resource.
Prodan also looks for firms that have an excess inventory, in terms of properties, that will add oil and gas reserves and production. "There is a built-up, internal momentum for their operations. There is growth," he says. Finally, he studies the companies' fundamental valuations, using net asset values and projected cash flow per share. Rather than invest in senior players that have limited growth prospects, he tends to focus on smaller firms. "That's what drives the returns," he says. "They sometimes turn out to be the star stories, six to 18 months out." He says that being in the heart of the oil patch helps, since it enables him to identify attractive companies before the broader market.
A classic instance is Calgary-based junior Storm Energy Ltd. ( SEM/TSX). Several years ago, it attracted a lot of attention after it recapitalized under new management. But Prodan did not buy the stock until the price was low and the company had some successful discoveries.
"The valuations were below its peers, and it had a quality management team. So I took a position." Acquired in September 1999, at $2.50 a share, the stock, which has since spun off an energy trust, is now trading at $6.20.
A Calgary native whose father was in the oil industry service business, Prodan comes by his expertise naturally. During high school he had summer jobs working on oilrigs. Then he spent a year on a rig near Perth, Australia. "The only dangerous thing was the 45 C heat in the day, and 5 C cold at night."
While Prodan had his share of adventures, he decided to get into the retail brokerage business, based on the example of an uncle. With that objective in mind, he enrolled at the University of Saskatchewan, where he graduated with a bachelor of arts in economics in 1986.
He spent three years as a broker at RBC Dominion Securities Inc. in Calgary, where he was hired in 1989 by Peters & Co., the only investment dealer in the city specializing in oil and gas. After four years, he left to co-found FirstEnergy Capital Corp., where he was instrumental in about $4 billion of equity financings.
In January 1998, he switched to the so-called "buy" side, when he took over managing Dominion Equity Resource. "I was looking for new challenges. No one in Calgary was aggressively managing money focused on the energy sector, other than this little fund that had about $8 million in assets. I should be able to do that, I thought, and show performance," he says.
While focusing on smaller firms, Prodan also takes a concentrated approach. He holds 25 to 30 names, whose maximum single weighting is 4% on a cost basis. "If you meet the industry people on a regular basis, you can develop a lot more confidence in the profile of a company," he says. "I can take on more risk by having fewer stocks. But that's because I am constantly in touch with these companies."
Prodan says he will generally hold a position for about 12 months. Over the past five years, his rate of portfolio turnover has ranged between 89% last year and 193.6% in 2001. Yet, as his holding in Storm Energy demonstrates, he has kept some names for three years or longer, using them as core positions.
After having guided the five-star Morningstar-rated fund to top-quartile, double-digit performance over the three- and five-year periods ended May 31, Prodan remains bullish on the energy sector. "We are still on a general upswing, based on what commodity prices are doing," he says.
Prodan has positioned about three-quarters of the fund in natural gas exploration firms. "The real opportunities are in small companies that have a track record of finding oil and gas reserves through the drill bit—that is, exploration, rather than acquiring assets and exploiting them."
Admittedly, recent high gas prices have dampened demand, he says, noting that some industries have switched to fuels such as coal. As a result, he does not expect gas to move beyond US$6 per million cubic feet.
"Nor do I believe gas will go below US$4.50 for a sustainable period," he adds. "But it is still very economic for companies to find new reserves—and make a great deal of money at those prices."
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