oil and gas

ZARGON OIL & GAS $12.58 (Toronto symbol ZAR; TSINetwork Rating: Speculative) (403-264-9992; www.zargon.ca; Shares outstanding: 29.2 million; Market cap: $367.3 million; Dividend yield: 9.5%) produces natural gas and oil in Alberta, Manitoba, Saskatchewan and North Dakota. Its production is 60% oil and 40% gas.

In the three months ended September 30, 2011, Zargon produced 9,014 barrels of oil equivalent per day. That’s down 10.7% from 10,094 barrels a year earlier. The company sold some less-important properties; that was the main reason for the drop. The lower production pushed down Zargon’s cash flow per share by 27.5%, to $0.50 from $0.69 a year earlier.

The company continues to successfully drill horizontal wells in the Alberta Plains North area. Horizontal drilling involves drilling development wells sideways or at an angle to reach isolated pockets of gas or to follow a reservoir spread out in a narrow layer. Horizontal drilling works well in places where conventional drilling is impossible or too expensive.

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COMPUTER MODELLING GROUP $15.32 (Toronto symbol CMG; TSINetwork Rating: Speculative) (403- 531-1300; www.cmgroup.com; Shares outstanding: 37.8 million; Market cap: $579.1 million; Dividend yield: 2.9%) reports that its revenue fell 10.1% in the three months ended September 30, 2011, to $12.0 million from $13.3 million a year earlier.

Licence revenue rose to $10.9 million from $10.8 million, but that was offset by a 57.0% drop in consulting and professional-services revenue, to $1.1 million from $2.5 million. The company consulted on a few large, one-time projects a year ago. Earnings per share fell 7.7%, to $0.12 from $0.13.

Already a leader in complex heavy-oil and oil-sands simulations, Computer Modelling should profit as oil and gas producers continue to develop other unconventional sources, such as shale gas.

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PASON SYSTEMS $11.74 (Toronto symbol PSI; TSINetwork Rating: Speculative) (403-301-3400; www.pason.com; Shares outstanding: 82.3 million; Market cap: $966.2 million; Dividend yield: 3.4%) rents equipment for monitoring and managing oil and gas rigs. It also sells communication systems, such as its satellite system, which companies use to remotely collect data from their drilling operations. Pason serves oil and gas producers and drilling contractors throughout Canada, the U.S., Mexico and Argentina.

In the three months ended September 30, 2011, Pason’s revenue rose 29.2%, to $88.7 million from $68.7 million a year earlier. Many of the company’s clients increased their drilling, especially for shale gas and oil.

Earnings jumped 140.0%, to $28.5 million, or $0.35 a share, from $11.9 million, or $0.15 a share. The increased drilling pushed up Pason’s earnings. Strong demand also let the company raise its prices.

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PRECISION DRILLING CORP. $11 (Toronto symbol PD; Aggressive Growth Portfolio, Resource sector; Shares outstanding: 276.1 million; Market cap: $3.0 billion; Price-to-sales ratio: 1.7; No dividends paid since February 2009; TSINetwork Rating: Extra Risk; www.precisiondrilling.com) provides contract-drilling services to land-based oil and gas producers in Canada, the U.S. and Mexico. The company continues to see strong demand for its Super Series horizontal-drilling rigs. Horizontal drilling involves drilling development wells sideways or at an angle to reach isolated pockets of oil or gas. Horizontal drilling works well in situations where conventional drilling is either impossible or too expensive. Precision is now building 49 Super Series rigs, up from its earlier plan to build 30. It will also decommission 49 of its older rigs. Retiring the older rigs will cost Precision between $100 million and $120 million....

Chinese stocks are down roughly 22% since April 2011. That’s largely because investors fear that weak growth and high debt levels in Europe and the U.S. will slow China’s export-driven economy. However, the long-term outlook for China, and Chinese stocks, is bright. One of the best ways for investors to tap into that growth is through low-fee exchange-traded funds (ETFs). Here are two Chinese ETF recommendations. One invests in all publicly traded Chinese stocks available to foreign investors. The other holds small-cap Chinese stocks....

CRESCENT POINT ENERGY CORP. $44.35 (Toronto symbol CPG; Shares outstanding: 277.9 million; Market cap: $12.3 billion; TSINetwork Rating: Extra Risk; Dividend yield: 6.2%; www.crescentpointenergy.com) produces oil and natural gas in western Canada. Its production is weighted 90% toward oil and 10% to gas. The company continues to focus on its Bakken light-oil development in southeastern Saskatchewan. For all of 2011, Crescent Point will likely spend at least $1.1 billion on exploration at Bakken. That should rise even higher in 2012. In the three months ended September 30, 2011, Crescent Point’s cash flow per share rose 19.8%, to $1.09 from $0.91....

PEMBINA PIPELINE $29.75 (Toronto symbol PPL; Shares outstanding: 167.3 million; Market cap: $5.0 billion; TSI Network Rating: Extra Risk; Dividend yield: 5.2%; www.pembina.com) owns pipeline systems with a total length of over 7,500 kilometres. These lines pump oil and gas from fields in B.C. and Alberta to refineries, or feed into major pipelines, such as the Enbridge Pipeline System. Pembina also owns the Syncrude, Horizon and Cheecham pipelines, which pump crude oil from the Alberta oil sands. In addition, the company holds a 50% stake in the Fort Saskatchewan Ethylene Storage Limited Partnership. It also owns the Cutbank Complex, a network of natural gas gathering and processing facilities. In the three months ended September 30, 2011, Pembina’s cash flow rose 57.0%, to $84.8 million, or $0.51 a share, from $54.0 million, or $0.33 a share, a year earlier. That’s because producers shipped more oil and gas through Pembina’s pipelines....

Theme investing has wide investment appeal, simply because the association with a particular investment theme seems to make profit easier to come by, if not inevitable. For instance, when the Internet theme hit the markets in the late 1990s, many investors flooded into Internet-related stocks. However, many of these investors, if not a majority, wound up losing money. They were right in assuming that the Internet would change the world, but they were wrong in assuming that all Internet-related stocks would gain. They made the most basic investment mistake of them all: neglecting to insist on investment quality. In recent years, many investors have asked about investments that can tap into the theme of the growing need for clean water in a global economy. A number of companies qualify as potential water investments. But many labour under major drawbacks such as a need to deal with troublesome and corrupt bureaucracies in countries most in need of clean water, a lack of significant profit prospects and insiders whose real talent is stock promotion rather than water investment....

Xylem Inc., $23.49, symbol XYL on New York (Shares outstanding: 184.6 million; Market cap: $4.3 billion; www.xyleminc.com), sells equipment and services for the full spectrum of clean water and wastewater applications: from collecting, distributing, using and returning water to the environment. Xylem is a Greek-derived word that refers to vascular tissue that carries water and nutrients through plants. The company operates through two divisions: The Water Infrastructure division sells a wide range of products, including water and wastewater pumps, controls and systems, as well as water treatment and testing equipment....

Western Energy Services, $7.13, symbol WRG on Toronto (Shares outstanding: 60.6 million; Market cap: $413.2 million; www.wesc.ca), owns a fleet of oil and gas drilling rigs that it leases to producers in Canada and the U.S. The company has a direct interest in the growth of shale oil and gas production, due to the fact that all its rigs are capable of drilling horizontal wells (also called “slant wells”). Oil and gas developers use horizontal wells to carry out fracturing or “fracking” on so-called “tight” gas and oil formations which occur in sand, coal and shale. These mineral deposits are too dense or “tight” to let the gas or oil they contain flow freely into the well bore. Fracking cracks the formation and releases the gas and oil. In the three months ended September 30, 2011, Western Energy’s revenue jumped to $80.8 million from $16.5 million a year earlier. That mainly reflects contributions from companies that Western Energy acquired in the past year. These acquisitions expanded its fleet its of drilling rigs to 42 at the end of September 2011, from 14 a year earlier. The company also has three more rigs under construction. Before one-time items, earnings rose 40.9% in the three months, to $13.9 million from $9.9 million a year earlier. However, per-share earnings fell 35.1%, to $0.24 from $0.37, on more shares outstanding....