It has been the continued strength of the crude oil market, through the very bearish (and wrong) predictions of most of the major wirehouse analysts that has informed most of my E+P plays over the last 2 years and made us so much money. But with most of the gains in the US E+P stocks already booked in my view, but with a continued belief in high and sticky crude oil prices, I’ve searched high and low for new opportunities, and I think I’ve found a small one: In Canadian oil.
I’ve talked around the Canadian producers in several columns over the last 6 months, believing that the underlying strength in Canadian names would come from the continued development and production in the oil sands of the Athabasca. With a continued intransigence on the part of the White House to approve the Keystone pipeline (a move I had thought they’d be forced into by now), those Canadian tar sands plays have been waiting for infrastructure build-outs to release their potential value. I’m not walking away from long-term recommendations like Cenovus (CVE) -a ‘leader’ in very old-school technology of oil sands extraction, but the really great money on CVE is still probably more than a year away. Perhaps the latest TransCanada (TRP) proposal on an Eastern pipe (Energy East) will be the key catalyst they need.
But another obvious play has started to pique my interest and I’ve begun accumulating Canadian oil E+P’s who have be buying up acreage in the Torquay region. I’m now ready to recommend Crescent Point Energy (CPG).
In many ways, this is a bit of an easy and somewhat unaggressive play. The Torquay is really just an extension of the Three Forks/Bakken shale play that drifts upwards into Saskatchewan and has been so far less developed and therefore less hyped than the ‘standard’ Bakken strongholds like Continental Resources (CLR) and EOG Resources (EOG). But the early results from the Canadian side of this play have been just as good and two Canadian E+P’s have been buying acreage in the Torquay hand-over-fist. One of them is Vermillion energy (VET) and the other my idea of CPG, but with Crescent Point I’m getting a more aggressive purchasing of acreage ($1.1B buyout of CanEra last month) and a very lovely 6.5% dividend that will soften the admittedly long wait time I’ll need to have for this payoff.
While the development time will be long to ramp up the number of wells to make the ‘Canadian Bakken’ look anything like the US one, the lag time to getting a reaction from the stock shouldn’t be. In the shale plays, it’s been very much a game of finding the potential to making big money in the shares – by the time real production is online, most of the profit has been made already.
Numbers for the play already very much mimic what was seen in early development in North Dakota – a very reasonable sinking cost of about $3m a well with an average pay of 250K barrels and an annual rate of return of over 300% a year.
These are all heady numbers that come from the company and I take with a grain of salt. But, it is an already strong production company that can afford to push some serious capital into this new Canadian shale play and see what results.
If they are anything like what EOG and CLR experienced south of the border, then the shares of Crescent Point are very cheap indeed. Recommended at $40.50