Looking Good, Alberta! Analysts Like What They See

On a lousy Wednesday before Thanksgiving, oil and gas stocks did OK.

And that was in the face of an unexpected rise in oil and gas inventories as reported by the American Petroleum Institute. The benchmark American Stock Exchange Oil and Gas Index was barely off on the day. And some of the oil and gas producers were up. Take, for example, a stock I first wrote about back in May, Alberta Energy(AOG). It rallied a bit today -- as it has since I first wrote it up -- about 15%. In a dicey market like this, it seems sensible to me to focus on stuff that is working.

So let's revisit Alberta to see if it still makes sense. By focusing on this company, I hope to illustrate a larger point -- prudent investors may want to consider high-quality, independent North American oil and gas producers, especially Canadians that trade at relative discounts to their U.S. peers.

More Than Just Hockey! Canada-based Alberta Energy has had a pretty good year, especially compared to the rest of the market

Source: BigCharts

Alberta's core production regions are in Canada, the U.S. and Ecuador. Traditionally a pure Canadian play, the company entered Ecuador in 1999 when it bought Pacalta Resources, and it came down into the U.S. in May of this year when it completed its acquisition of McMurry Oil. The company is also exploring for oil and gas in Australia, Argentina and the Caspian Sea.

Recent news at Alberta has been strong. In October, the company said its third-quarter profit nearly tripled from the comparable period a year ago. Cash flow, the company said, rose 107%. The day the company made the announcement, the stock closed at $39.44 and then weakened to a low of $36.06 before rebounding slightly to the $38-39 level of this week.

The relatively few analysts who follow the stock have remained positive since the earnings announcement.

Salomon Smith Barney's Daniel Blanchard said in a report that earnings per share should grow by 12% next year. (That is roughly equal to the stock's P/E based on 2001 estimated earnings.) Blanchard, whose firm has done investment banking for Alberta, has a buy recommendation on the stock.

So does Morgan Stanley Dean Witter, which has also performed investment banking for the company. It has a "strong buy" on the stock. Why? Analyst Lloyd Byrne said in a recent report that he expects the company to increase North American natural gas production by 22% next year. He recently boosted his earnings estimates for Alberta to reflect his thinking that output should rise faster than costs next year. He also is keen on management, which "continues to impress," as he says in his report.

Piling On

Merrill Lynch's Canadian strategist David Rosenberg also added his voice to the bull chorus in a report just this week.

He is urging investors to overweight Canadian energy plays, and his shopping list also includes Alberta. His thinking is pretty simple.

"Investors remain complacent of the prospect over a multi-year bull market in energy stocks, as equity markets continue to discount prices ... barely above $20/bbl and natural gas in the $2.75-$3.00/mcf range. The surprise will be just how long energy prices remain near current levels, with OECD crude oil stocks at a 25-year low, and North American natural gas reserves at unprecedentedly tight levels. We think natural gas, in particular, has tremendous long-term prospects, given that it is the fuel of choice for the booming U.S. electrical utility industry, as well [as] the emerging power generation technologies such as fuel cells and micro-turbines," wrote Rosenberg. He foresees demand growing at almost twice the rate of the 1990s.

Rosenberg also thinks that Canadian oil and gas stocks are just plain cheap. "From a valuation perspective," he writes, "Canadian E&P [exploration and production] stocks are currently trading at more than a 20% discount to their global peers on a trailing price/earnings basis. ... This, coupled with the undervalued Canadian dollar, can be expected to accelerate industry consolidation."

My interpretation of Rosenberg's words? Look for some of the Canadians to get bought as bigger players hunt for new oil and gas reserves.

One of the tricks to successful investing is catching a big theme and riding it for a good while. Alberta seems to be right on the curl of the wave of high natural gas and oil prices. If demand grows anywhere near the rate at which the analysts foresee, then Alberta will surely show good earnings growth. It trades at 12-14 times earnings, which suggests some reasonable chance of price appreciation if the company meets analysts' fairly conservative earnings and revenue expectations.

I note that a bunch of outstanding investment firms have recently bought into the company or increased their pre-existing stakes, according to 13F filings on file with the Securities and Exchange Commission. Those investment firms include: Chieftain Capital Management, Fidelity, Friess Associates and Hellman Jordan Management. Those in the know will recognize that these four shops have some of the best performance records around. They tend to look for financially sound companies with good growth prospects selling at reasonable prices. They seem to think they have found that in Alberta.

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