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A defensive approach to resource stocks

What are we looking for?

What money managers are buying.

The top holdings of portfolios can be a fountain of investment ideas. Today, we take a look at Norrep Resource Class at

More about the fund

The $47.5-million natural resource fund has been run by Steve Smith at Hesperian Capital Corp. since 2009. The fund, which focuses on smaller Canadian energy stocks, gained 27.1 per cent for the year ended Aug. 31 compared with 7.1 per cent for the S&P/TSX Capped Energy Index. Over two years, it has posted an average annual return of 24.5 per cent versus 7.2 per cent for the index.

Given this year's market volatility and memories of the 2008 carnage when investors dumped stocks out of fear, "we are still defensive," with portfolio holdings that can be easily sold to raise cash to buy beaten-down "premium" stocks, Mr. Smith said.

The energy services sector, however, offers some of the best opportunities now because "we believe the market is underestimating how robust drilling activity will be," said the manager, who looks for growth stocks trading at reasonable prices.

He expects the price of oil to be range-bound between $80 (U.S.) and $100 a barrel unless there is a quick global economic rebound, which he does not foresee. While natural gas prices are still weak, they will inevitably recover, he said, adding he owns gas firms that can be profitable in the current environment and benefit from any price hikes.

What did we find?

Some energy stocks still have robust gains this year despite challenging markets. Open Range Energy Corp. was up 410 per cent as of Sept. 20, while Secure Energy Services Inc. had gained 35.4 per cent.

Secure Energy Services, which focuses on the waste-management business being outsourced by the oil and gas sector, still has lots of potential, Mr. Smith said. Because the sector is an oligopoly, "the result is great margins."

Cash-rich Secure has also been making acquisitions, and is one of the fastest-growing service companies in an expanding market niche, he said.

Mr. Smith is also very upbeat on Canyon Services Group Inc., a fracturing and well-stimulation company. It is benefiting from the growth trend toward horizontal drilling technology that breaks up tight rock to let oil and gas flow. "We like its growth profile," he said, adding that this stock is still not covered widely by the brokerage firms.

Natural gas producer Peyto Exploration & Development Corp. is also attractive because it has quality assets, a low-cost structure and "and an almost unheard of cash-flow margin of 80 per cent," he said. After converting from an income trust to a corporation, "it is executing marvellously on adding production" to return to a growth profile, he said. It has a dividend yield of 3.4 per cent "so we get paid while we wait out the inevitable rise in natural gas prices," he added.



Company nameSymbol$ Price (Sep. 20)52-wk high $52-wk low $1-wk % price chgYTD % price chg1-yr % price chgP/EYield %Market cap ($-mil)Volume
Legacy Oil + GasLEG-T10.6817.478.851.7-31.3-3.8n/an/a1,525.71,596,223
Open Range EnergyONR-T9.6910.381.106.6410.0645.4484.5n/a658.9366,575
Peyto Explor. & Develop.PEY-T21.3923.8014.285.415.747.122.83.42,846.2552,277
Secure Energy ServicesSES-T7.9210.103.755.735.4106.872.0n/a505.8133,499
Whitecap ResourcesWCP-T7.037.604.103.411.159.8n/an/a507.3324,802
Canadian Natural ResourcesCNQ-T32.8750.5032.74-2.8-25.9-,061.02,860,338
Canyon Services GroupFRC-T11.6816.,551
Surge Energy Inc.SGY-X8.7010.455.30-4.919.558.2n/an/a488.0423,255
Yoho ResourcesYO-X3.204.402.226.33.918.1n/an/a108.05,000
Baytex Energy Corp.BTE-T47.0658.7635.354.81.031.341.65.15,420.2470,058
Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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