Not too late to jump into the oil sector

Energize your portfolio.

An oil pump works at sunset Wednesday, June 8, 2011, in the desert oil fields of Sakhir, Bahrain. (Photo: Hasan Jamali/AP)

An oil pump works at sunset Wednesday, June 8, 2011, in the desert oil fields of Sakhir, Bahrain. (Photo: Hasan Jamali/AP)

If you’ve been wondering whether those energy stocks with rising prices would make a good addition to your portfolio, analysts say you’ve still got some time to reap the benefits of energy shares before the sector loses momentum.

Crude oil prices took a brief pause yesterday from their steep growth curve which saw contracts test the US$109 level. A combination of political concerns in the Mideast, anticipation of a stronger economy and lower crude-oil inventories in the U.S. has been driving up prices and energy stocks since the beginning of the summer.

Canaccord Genuity analyst Christopher Brown doesn’t think the ride is over yet for Canadian investors, particularly because many U.S. investors haven’t moved back into the market yet.

“I think that a lot of this rise has to do with some fundamental investors, typically Canadian-based, that are pushing a lot of these investments up on an institutional side,” he said.

“You’ll see the next step or the next leg to the share price appreciation,” when U.S. dollars start moving through again.

Brown doesn’t expect U.S. investment or European interest investment to return to the Canadian stocks until 2014, which means investors have a window between now and the year’s end to hop on board with energy companies that fit the minimum requirements for a good investment. In oil production, Brown looks for companies that are producing at least 3000 B/D on the junior side, since they have often proven themselves capable of a minimum level of self-sufficiency and cash flow (normally around $50 million or above) by that point.

“I think that there’s still more to come, on not only the reserve basis, but exploration success that some of these companies may incur,” Brown said.

While Brown doesn’t specifically cover Canadian energy companies, he does point to a few that would make particularly good stock picks. On the larger side, Calgary oil and natural gas producer Crescent Point Energy Corp. has “substantive production [and] cash flow,” and would be a favoured pick for those looking for a relatively quick return on their investment. In the junior category, Brown recommends another Calgary outfit, Strategic Oil and Gas, which has made its way over the 3000 B/D threshold but is still under the radar.

The current oil prices make this particular moment a good one to consider buying shares in energy companies, according to Edward Jones analyst Brian Youngberg, who covers energy companies outside of Canada. Energy stocks tend to move with oil prices, he noted, and the $100 oil price range is a “sweet spot.” If the price goes much higher, demand tends to decrease as people begin to drive less and look for alternate ways of getting around. Comparatively, prices in the 75 to 80 dollar range often stall exploration and drilling, as certain projects no longer make sense from a producer standpoint, Youngberg added.

For stock picks, Youngberg particularly has his eye on companies with a focus on the oil services sub-sector, and in the longer term, refining.

“Refining has a lot of issues right now. Oil prices moving up here lately has caused them to not do too well, and they tend to be more volatile and relatively more aggressive,” said Youngberg.

However, the valuations of refining companies are “very low right now,” so for patient long term investors, “it’s a great place to be,” he said, particularly recommending Texas-based refiners Valero Energy Corporation.

“There’s value in all areas I think,” added Youngberg, but refining and oil services “are the two that have the most upside right now.”

If you do decide to buy in, both analysts recommend keeping an eye on certain factors as you look for an opportunity to eventually sell.

For Brown, “it’s going to be market volumes and timing when the U.S. investor base starts returning to the Canadian market… when we start to see substantive volumes promoting the share prices well in excess of their fundamental values.”

Investors should also keep track of the global economy in general, advised Youngberg, particularly since the developing world is driving a lot of the demand for oil at the moment.

“If you start seeing that demand in the developing world – China, India, Asia, Africa – signs that that is really truly slowing down, that would obviously impact oil prices, which would go down. And most energy stocks just move with oil prices, simple as that,” he said.