oil and gas

Pat McKeough responds to many personal questions about specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for the Inner Circle. This week, an Inner Circle member asked about one of the more versatile resource stocks in Canada. This company provides housing and a variety of other essential services for remote oil and gas rigs and mining sites. Pat looks at the company’s prospects for growth and its plans to begin making acquisitions in foreign markets....

PENN WEST PETROLEUM $12.97 (Toronto symbol PWT; Shares outstanding: 472.9 million; Market cap: $6.1 billion; TSINetwork Rating: Average; Dividend yield: 8.3%) has agreed to sell $1.3 billion worth of non-core properties. In all, these produce about 12,000 barrels per day. To put that figure in perspective, it’s 7.4% of the 163,181 barrels a day that Penn West produced in the quarter ended June 30, 2012. The company now aims to sharply reduce its long-term debt of $3.4 billion, which is a somewhat high 55.7% of its market cap. That will lower its interest costs and let it invest more money in its highest-potential oil and gas properties....

Black Diamond Group, $21.14, symbol BDI on Toronto (Shares outstanding: 41.2 million; Market cap: $871.0 million; www.blackdiamondlimited.com), is a Calgary-based company that builds modular buildings and housing for workers at remote sites, such as mines and drilling rigs. It also provides oilfield services and equipment. Aside from oil and gas and mining, Black Diamond’s customers include electricity, construction and engineering businesses, as well as government agencies. The company’s Camps division rents and sells remote workforce housing and provides associated services. Its temporary structures include large dormitories, kitchen/dining facilities and recreation complexes. This division is largely focused on western Canada. The company’s logistics division operates remote lodging facilities for third parties. It also owns the sprawling Sunday Creek Lodge, which provides accommodations for corporate clients in the northern Alberta oil sands. Black Diamond Logistics also transports, installs, dismantles, repairs and maintains modular structures for customers....

These three industrial stocks make a wide range of products. That helps cut their risk during periods of slow growth, such as the past year. It also puts them in a good position to profit when the global economy picks up. GENERAL ELECTRIC CO. $21 (New York symbol GE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.6 billion; Market cap: $222.6 billion; Price-to-sales ratio: 1.5; Dividend yield: 3.2%; TSINetwork Rating: Above Average; www.ge.com) is one of the world’s largest manufacturers. It makes equipment for generating and distributing electricity, such as turbines; aircraft engines; health care equipment; home appliances and lighting; and locomotives. To cut the risk of further losses following the 2008 / 2009 financial crisis, the company continues to scale back its GE Capital subsidiary, which provides loans and other financial services to GE’s customers. This business now accounts for 31% of GE’s overall revenue and 45% of its earnings....

Petrominerales Ltd., $8.18, symbol PMG on Toronto (Shares outstanding: 89.7 million; Market cap: $733.7 million; www.petrominerales.com), is a Calgary-based international oil and gas exploration and production company with operations in Colombia and Peru. In the three months ended June 30, 2012, Petrominerales’ cash flow fell 11.4%, to $1.78 a share from $2.01 a year earlier. The company expects to report cash flow of $4.78 a share this year, but that could prove very optimistic if its limited exploration success continues. We don’t recommend Petrominerales....

GENERAL ELECTRIC CO. $21 (New York symbol GE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.6 billion; Market cap: $222.6 billion; Price-to-sales ratio: 1.5; Dividend yield: 3.2%; TSINetwork Rating: Above Average; www.ge.com) is one of the world’s largest manufacturers. It makes equipment for generating and distributing electricity, such as turbines; aircraft engines; health care equipment; home appliances and lighting; and locomotives.

To cut the risk of further losses following the 2008 / 2009 financial crisis, the company continues to scale back its GE Capital subsidiary, which provides loans and other financial services to GE’s customers. This business now accounts for 31% of GE’s overall revenue and 45% of its earnings.

In the three months ended September 30, 2012, GE’s revenue rose 2.8%, to $36.3 billion from $35.4 billion a year earlier. Revenue from the industrial businesses rose 7.4%, partly because GE bought companies that supply equipment to oil and gas producers. That offset lower sales of wind-power gear. The company continues to shrink GE Capital. As a result, this division’s revenue fell 5.4%. Earnings rose 9.9%, to $3.8 billion from $3.5 billion. Because of fewer shares outstanding, earnings per share rose 12.5%, to $0.36 from $0.32.

...

HEWLETT-PACKARD CO., $14.73, New York symbol HPQ, fell 14% this week after the company cut its earnings forecast for its 2013 fiscal year, which ends October 31, 2013. Hewlett now expects to earn between $3.40 and $3.60 a share during the year. These figures exclude costs related to the company’s recent restructuring plan, which includes merging its personal computer and printer divisions, simplifying its product lines and cutting 8% of its workforce. The new forecast is well below the consensus estimate of $4.18 a share. The company’s enterprise services division, which sells server computers and services to businesses, recently lost four major customers; this is the main reason for the lower earnings forecast. Consumers are also holding off on computer and printer purchases due to the slow global economy....

Cequence Energy, $1.77, symbol CQE on Toronto (Shares outstanding: 191.8 million; Market cap: $339.5 million; www.cequence-energy.com), explores for and produces oil and natural gas in Alberta and B.C. Gas makes up 87% of its daily output; the remaining 13% is oil. In the three months ended June 30, 2012, Cequence’s average daily output fell 5.1%, to 8,660 barrels of oil equivalent (including gas) from 9,125 barrels a year earlier. The company slowed production by 600 barrels per day due to low gas prices, and temporary disruptions cut its output by a further 1,300 barrels per day. The production drop and lower natural gas prices pushed down Cequence’s cash flow to $0.03 a share from $0.08....

MARKET VECTORS VIETNAM ETF $16.84 (New York symbol VNM; buy or sell through brokers) holds shares of Vietnamese companies or foreign firms that get a significant amount of their revenue from Vietnam.

The ETF’s top 10 holdings are Vietin Commercial Bank, 8.1%; Vincom Corp. (real estate), 7.4%; PetroVietnam Fertilizer and Chemical, 7.2%; Talisman Energy (a Canadian producer with interests off Vietnam’s coast), 6.5%; JSC Bank, 5.9%; Premier Oil (a U.K.-based producer with a 53.1% stake in the huge Chim Sao oil project off southern Vietnam), 5.3%; Oil & Natural Gas Corp. (an India-based oil and gas company), 5.1%; Baoviet Holdings (finance and insurance), 4.7%; Gamuda Bhd (a Malaysiabased construction group), 4.6%; and Charoen Pokp-hand Foods (a Thailand-based food conglomerate),4.2%.

Market Vectors Vietnam ETF’s industry breakdown is as follows: Financials, 44.0%; Energy, 26.4%; Industrials, 11.2%; Materials, 7.9%; Consumer Discretionary, 4.3%; Consumer Staples, 4.1%; and Utilities, 2.2%. Its expense ratio is 0.76%.

...

ISHARES FTSE/XINHUA CHINA 25 INDEX FUND $32.17 (New York symbol FXI; buy or sell through brokers) is an ETF that aims to track the FTSE/Xinhua China 25 Index, which is made up of the 25 largest and most liquid Chinese stocks. All of the stocks in the index trade on the Hong Kong exchange. Some also trade as American Depositary Receipts (ADRs) on the New York exchange.

The fund’s top holdings are China Mobile, 10.3%; China Construction Bank, 8.4%; Industrial & Commercial Bank, 7.6%; CNOOC, 7.0%; Bank of China, 5.9%; China Telecom, 4.8%; China Unicom (Hong Kong), 4.6%; China Life Insurance, 4.6%; China Shenhua, 4.3%; and China Petroleum and Chemical, 4.0%.

The fund’s holdings give it the following industry breakdown: Financials, 53.1%; Telecommunications, 19.7%; Oil and Gas, 14.6%; Basic Materials, 9.8%; and Industrials, 1.9%. Its expense ratio is 0.72%.

...