oil and gas

Rock Energy, $3.19, symbol RE on Toronto (Shares outstanding: 39.4 million; Market cap: $125.6 million; www.rockenergy.ca), produces oil and gas in Western Canada, with a focus on the greater Lloydminster area along the Alberta/Saskatchewan border. Its output is 92% oil and 8% gas. In the three months ended September 30, 2013, the company produced 3,886 barrels of oil equivalent a day, up 73.3% from 2,159 barrels a year earlier. Rock’s cash flow per share jumped to $0.29 from $0.09. The company’s total debt of $3.7 million is just 2.9% of its $125.6-million market cap. That, plus its rising cash flow, gives it the funds to keep drilling and increasing its output. The stock trades at 3.0 times Rock’s forecast 2014 cash flow of $1.08 a share....

Growth by acquisition can be risky, as newly purchased companies may develop unforeseen problems, especially in an unsettled economy. Today we look at how growth by acquisition is working for two pipeline companies we cover regularly in our advisory on conservative investing, Canadian Wealth Advisor. ...

CENOVUS ENERGY INC. $28 (New York symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 755.8 million; Market cap: $21.2 billion; Priceto- sales ratio: 1.2; Dividend yield: 3.2%; TSINetwork Rating: Average; www.cenovus.com) gets 60% of its production from its three heavy oil projects in Alberta and one in Saskatchewan. Conventional oil and natural gas wells supply the remaining 40%.

U.S.-based ConocoPhillips (New York symbol COP) owns 50% of Cenovus’s main Foster Creek and Christina Lake oil sands projects in Alberta. Cenovus ships the bitumen from these fields to its 50%-owned refineries in Illinois and Texas. Phillips 66 (New York symbol PSX) owns the other 50% of these refineries.

The company expects lower cash flow in 2014, partly due to rising operating costs at its oil sands projects. It’s now working on making these operations more efficient.
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APACHE CORP. $86 (New York symbol APA; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 399.2 million; Market cap: $34.3 billion; Price-to-sales ratio: 2.0; Dividend yield: 0.9%; TSINetwork Rating: Average; www. apachecorp.com) continues to sell some its less important oil and gas properties, including its offshore fields in the Gulf of Mexico and a third of its Egyptian operations. In all, the company expects to raise $4 billion from these sales in 2013.

Apache will use half of the proceeds to pay down its $10.9 billion of long-term debt (as of September 30, 2013), which is equal to 32% of its market cap.

The company is also using the cash to increase production from its North American onshore properties. This approach is much cheaper than offshore drilling and has less political risk. Apache now gets 56% of its production from its onshore fields, up from 32% in 2009.
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CHEVRON CORP. $122 (New York symbol CVX; Conservative Growth Portfolio, Resources sector; Shares outstanding: 1.9 billion; Market cap: $231.8 billion; Price-to-sales ratio: 1.0; Dividend yield: 3.3%; TSINetwork Rating: Above Average; www. chevron.com) is the second-largest integrated oil company in the U.S., after ExxonMobil.

The company plans to spend $39.8 billion on exploration and upgrading its operations in 2014. That’s down 5.2% from the $42 billion it will likely spend in 2013. Chevron will devote 90% of the 2014 capital budget to extracting oil and gas. The remaining 10% will go toward improving its refineries and gas stations.

Among Chevron’s bigger projects is its 47.3%-owned Gorgon natural gas development off Australia’s west coast. Gorgon, which includes a plant that liquefies gas for export, is 75% complete and should start up in 2015. Its reserves will last 40 years.
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FORTIS INC., $30.12, Toronto symbol FTS, fell 4% this week after it agreed to buy UNS Energy Corp. (New York symbol UNS), which distributes electricity and natural gas to 654,000 clients in Arizona. UNS also operates power plants with a total capacity of 2,420 megawatts. These facilities get their power from coal (59%), natural gas (34%), solar (1%) and other fuels (6%). Fortis will pay $4.3 billion U.S., which includes assuming $1.8 billion U.S. of UNS’s debt. This is a big purchase for Fortis, which has a $6.4-billion (Canadian) market cap (or the value of all its outstanding shares). The company aims to complete the deal by the end of 2014. After the purchase, Fortis will pay an additional $200 million U.S. to help UNS fund its planned purchases of two gas-fired plants. That will lower its reliance on coal....

Stocks in the Resource and Manufacturing & Industry sectors tend to be more volatile than those in the Finance, Utilities and Consumer sectors. That’s because demand for their products moves up and down with the economy.

To cut your risk in the Manufacturing sector, it’s best to stick with well-established firms like the three we analyze below.

All three are leaders in their niche markets, which helps them stay profitable during downturns and thrive when the economy recovers....

PRECISION DRILLING CORP., $9.75, Toronto symbol PD, sells contract drilling services to oil and natural gas producers. The stock fell sharply after the Alberta Investment Management Company (AIMCo) sold its entire 15% stake in the company for $9.50 to $9.75 a share. AIMCo is a Crown corporation that manages Alberta’s public-sector pension plans and other special funds. Precision ran into trouble in 2009, because the credit crisis hurt its ability to refinance short-term loans it needed to buy U.S.-based contract driller Grey Wolf Inc. That’s when AIMCo purchased notes and shares in Precision....

ENCANA CORP. $20.28 (Toronto symbol ECA; Shares outstanding: 740.2 million; Market cap: $15.0 billion; TSINetwork Rating: Average; Dividend yield: 1.4%; www.encana- .com) is one of North America’s largest natural gas producers.

However, rising shale gas production has cut prices from $11.50 U.S....

PENN WEST PETROLEUM $9.14 (Toronto symbol PWT; Shares outstanding: 488.1 million; Market cap: $4.4 billion; TSINetwork Rating: A v e r a g e ; D i v i d e n d y i e l d : 6 . 1 % ; www.pennwest.com) is one of Canada’s largest oil and gas producers.

Penn West continues to shore up its finances and take steps to boost its value since appointing Rick George as chairman and Allan Markin as vice-chairman....