The year is pretty much over, another ‘risk off’ year that left the commodity sector in pain. However, 2012 still had its winners which returned impressive gains for those that identified the opportunity, took the risk and held on. In 2012, 6 out of 10 top performing oil and gas stocks are junior E&P companies.
The table below shows the best and worst oil and gas stocks in 2012 with a current price above $1 for stocks that are still listed. Nexen is the only senior producer to be included and only because it was taken over by CNOOC. The stock has not delisted yet so it made the list.
Among the winning stocks there are 3 small oilfield services companies that made it. I’ve never heard of these stocks so I went on to investigate why they got rewarded in an environment where commodity price volatility and widening differentials generally hurt the sector. Let’s take a closer look at these OFS stocks.
Macro Enterprises specializes in the construction and maintenance of small-to mid-inch pipelines, facilities and gathering systems. No surprise this stock was a top performer, unless spending in Western Canada drops to $0, there will always be demand for their services. Looking ahead to all the rosy forecasts of increasing Canadian oil and natural gas production demand is only expected to grow. A nice defensive stock minus a lot of risk related to commodity pricing and drilling. Too bad it doesn’t pay a dividend.
LoneStar West provides Hydro-Excavation services. That’s using pressurized water to agitate the earth and a powerful vacuum to remove the soil and debris. The process exposes underground utilities and pipelines (diversified customer base). Not a very liquid stock, seems to have made its move in the second half of the year.
High Arctic Energy Services operates 3 business segments: Equipment Rentals, Nitrogen Services and Snubbing Services (inserting drillpipe into the wellbore). This stock tops it off with a dividend of $0.12 per year – or 5.5% yield!
The 6 Junior winners this year are divided half/half between domestic and international E&Ps. Manitok Energy, DeeThree Exploration and DonnyCreek Energy are all Canadian based. The interesting one among these 3 is DonnyCreek as it is natural gas weighted company but in reality a play on Condensate. These 3 companies prove that even with all the headache the oil patch is going through, there’s still money to be made.
The 3 International focused stocks are Mart Resources, Africa Oil and WesterZagros. Mart is in Nigeria, Africa Oil in Eastern Africa and WestZargos in Kurdistan. Africa Oil made significant oil discovery in Kenya whereas Western Zargos made theirs in Northern Iraq. Mart Resources is sitting on a giant oil field in Nigeria and I expect to see the stock make this list AGAIN next year.
On the losing team there are 2 stocks that were once so promising, Poseidon Concepts and Gasfrac Energy Services. These 2 have caused massive losses to investors this year. While Gasfrac’s technology failed to gain traction, no one saw the coming destruction of Poseidon. How, what, where and why? No one has any answers on how it happened with Poseidon including management it seems. According to their last news release, they just started to investigate…(Do I hear another lawsuit is on the way?)
Then there’s Pengrowth Energy, so glad I sold it when they acquired NAL Energy early in the year. On the other hand there’s my Xtreme Drilling and Coil Services which provided me with ‘extreme’ losses – paper losses that is. The investment scenario I invested upon didn’t quite unravel as I expected. XDC is finally entering its free cash flow generation mode in 2013 and the stock has recovered from it’s all time low of $1 and should continue upwards in my opinion as quarterly results show improvement in the bottom line.
Niko, HRT and Canacol are international companies and the remaining stocks LPR, SRX and FEL are natural gas weighted. They got decimated following the record low natural gas price environment we went through this year. Obviously, this list does not include stocks currently trading below $1 that experienced severe losses this year such as our Swan Hills players SecondWave Petroleum and Arcan Resources. Bowood Energy (now LGX Oil and Gas) which was once one of the best stocks for pure exposure to the emerging Alberta Bakken oil play turned out to be pure exposure to massive losses. Between PSN, GFS and LGX one has to be very nimble when investing in one trick ponies no matter how exciting the story sounds.
There’s a couple of obvious lessons one should be reminded of from looking at this list: due to the volatility and cyclical nature of this sector it is best to cut losses early and take profits often. These lessons apply perfectly on my speculative portfolio, for example my XDC position was very profitable at some point yet I wanted to see my investment scenario through. For 2013 with Brent above $100 a barrel, international producers seem like the place to be, no discounts or pipeline constraints to worry about. Except it will be as much challenging as picking domestic stocks.
This should be the last post for 2012, as such Happy New Year to all! Wishing you and your families a lot of health and prosperity. Money is worth nothing if you’re not healthy so a lot of health first!
For OGA users, there will be an update coming soon as 2 new features are deployed. Production estimates for 2013 are being rolled out for stocks in the coverage universe.