Oil stocks could be in for another bumpy ride this year, but astute investors might find opportunities if they know where to look.
Brian See, vice-president and portfolio manager at CIBC Asset Management, expects continued volatility this year, forecasting WTI prices to fluctuate from $50 to $60 a barrel due to supply and demand fundamentals.
On Feb. 25, WTI opened at US$57.15. In the last six months, WTI oil prices bounced from a high of $76.41 to a low of $42.53.
In a Feb. 7 interview, See, who manages the CIBC Energy Fund, outlined three companies poised to please investors amid oil sector volatility.
- Concho Resources (CXO)
Concho Resources is a hit with See because it’s a low-cost operator in the Permian Basin, an area expected to have pipeline takeaway capacity in the second half of 2019.
“There’s a line of sight of getting the barrels out from the Permian Basin into the Gulf Coast,” See said. “Concho Resources is a big beneficiary of this because they’re one of the largest operators.”
It also produces oil at low break-even prices and has a strong management team and a good balance sheet, he said.
Further, Concho acquired RSP Permian (RSPP) in July 2018, making it the largest unconventional shale producer in the Permian Basin.
“We think it sets up the company for multiple years of growth at an attractive rate and good rates of return,” See said.
Shares of Concho Resources opened at US$104.53 on Feb. 25.
- BP Petroleum (BP)
A major, globally integrated company, BP Petroleum is set to benefit from Canada’s oil sector challenges, See said, such as pipeline capacity issues and political and regulatory risk. The situation has resulted in wide differentials for Canadian producers.
“More specifically, upstream Canadian producers are realizing low prices,” he said.
On the flip side, refiners benefit, and BP has an extensive U.S. refining network.
“What they’ve done is bought discounted Canadian crude at attractive prices and then processed that crude to sell gasoline and diesel,” See said. “They’re actually a beneficiary of the impending challenges in Canada, and that’s one of the reasons we like it.”
In July 2018, BP acquired the U.S. shale assets of global miner BHP Billiton for $10.5 billion—assets that represent an opportunity for synergy and increased growth, See said.
Investors can also be confident in the potential to be rewarded, he said.
“The free cash flow profile that BP is spitting out from the company from its assets is quite attractive,” See said, adding that the measure is one of the best among BP’s global peers.
Shares of BP Petroleum opened at US$42.38 on Feb. 25.
- Enbridge (ENB)
One of Canada’s largest pipeline operators also makes See’s list, based on solid growth fundamentals.
“The company has taken extensive steps to fix its balance sheets, roll up its [master limited partnership] structure and then get back on a trajectory of growth,” See said.
As a result, Enbridge is “attractive in terms of its dividend yield, valuation and future growth prospects,” he said.
Shares of Enbridge opened at $48.83 on Feb. 25.
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