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Patrick McKeough is one of Canada’s top safe-money advisors. The Wall Street Journal, Forbes and The Hulbert Financial Digest have all recognized his ability to find stocks with hidden value. He is editor and publisher of The Successful Investor, Stock Pickers Digest, Wall Street Stock Forecaster and Canadian Wealth Advisor; inventor of the Quick Profit/Value System and the ValuVesting System™. A best-selling Canadian author, he wrote Riding the Bull, the book that predicted the 1990s stock-market boom.

Exploration prospects a plus for these two

March 19, 2010 -  Be the first to comment
Posted by: Pat McKeough Filed in: Commodity Investments
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DELPHI ENERGY $3.18 (Toronto symbol DEE; SI Rating: Speculative) (403-265-6171; www.delphienergy.ca; Shares outstanding: 101.2 million; Market cap: $321.8 million; No dividends paid) explores for oil and gas in Alberta and B.C. Natural gas makes up 83% of its daily output.

In the three months ended September 30, 2009, Delphi’s average daily output rose 5.6%, to 6,773 barrels of oil equivalent (this measurement includes natural gas) from 6,409 barrels. Despite the higher production, Delphi’s cash flow per share fell 33.3%, to $0.16 from $0.24 a year earlier. That’s because of lower oil and natural-gas prices.

Delphi now holds 172,209 acres of undeveloped land. That’s up 37.3% from 125,359 acres in 2008. That gives it lots of drilling targets to increase output.

The company’s $96 million of debt is a manageable 30% of its market cap, and only 1.9 times its annualized cash flow (based on the latest quarter). The stock trades at only 6.0 times Delphi’s forecast 2009 cash flow of $0.53 a share.

Delphi is a buy for aggressive investors.

ZARGON ENERGY TRUST $20.18 (Toronto symbol ZAR.UN; SI Rating: Speculative) (403-264-9992; www.zargon.ca; Units outstanding: 23.2 million; Market cap: $468.2 million; Dividend yield: 10.7%) produces oil and natural gas in Alberta, Manitoba, Saskatchewan and North Dakota.

In the three months ended December 31, 2009, Zargon’s production rose 12.5%, to 10,586 barrels of oil equivalent per day (including natural gas) from 9,410 barrels. Its output is weighted 52% to oil and 48% to natural gas. This diversification helps cut its risk.

Despite the higher production, cash flow per share fell 2.1%, to $0.95 from $0.97 a year earlier. The drop was caused by lower oil and natural-gas prices.

The trust’s $76.6 million of long-term debt is just 16% of its market cap. It pays out only about 57% of its cash flow as distributions, and yields 10.7%. Ottawa will start taxing income trusts in 2011. At that point, Zargon plans to convert to a dividend-paying corporation. It then expects to pay out 50% of its cash flow as dividends. That could lower its monthly distribution from $0.18 to $0.15.

The trust used its strong balance sheet to make small acquisitions in 2009: In April, it paid $40 million for Masters Energy, and it recently bought Churchill Energy for $15 million. These added to its production and cash flow per unit. Zargon is still looking to buy other oil and gas firms.

The trust plans to spend about $58 million on exploration and development this year. That’s up 26.1% from the $46 million it spent in 2009.

The units trade at 5.9 times Zargon’s forecast 2010 cash flow of $3.40 a unit.

Zargon Energy Trust is a buy.

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