NEW YORK (The Deal) -- Earlier this month, RBC Capital Markets added three companies to its "energy best ideas list," a monthly compendium of its favorite stocks in the oil & gas and power & utilities sectors worldwide. And guess what? Not one of them is based in the U.S.
What does that say about investing in the U.S. oil and gas industry in an era of lower commodity prices? A lot, actually. It means it's becoming harder to find good energy stocks in the U.S. There are multiple reasons why.
Oil prices have been like a roller coaster, going from $100 to the low $40s to back up to $60, and no one seems to have a good grip on where they'll land. One analyst on a panel at Mayer Brown's energy conference in Houston on Wednesday thought oil would settle at around $40 to $50, while another thought they'd head back to around $80.
Despite oil prices trading at still low levels -- low enough to make some plays uneconomic -- valuations for U.S. oil and gas exploration and production stocks are still pretty dear. Simmons & Co. International analyst Pearce Hammond says 25% of the U.S. E&P stocks he covers are trading higher than last fall, when oil prices began to tumble.
"They're not frothy, but valuations are high," he said. And if you're a value investor looking for a bargain, there's always the risk a distressed name could become even more so -- or file for bankruptcy.
So who made RBC's list?
The first is Precision Drilling (PDS - Get Report), a Canadian oil services provider headed by CEO Kevin Neveu. RBC analyst Dan MacDonald views the company as one of the best offensive plays within its coverage group, as land drilling stocks are historically among the best performers during up-cycles and its high quality fleet should result in market share gains as exploration and production companies high-grade to tier-one rigs starting in the second half of this year.
Precision Drilling does a lot of business in the U.S., where its active rig count is down just 44% vs. 51% for the broader market. It also had cash of $449 million at the end of the first quarter and then received $69 million from the Ontario tax authorities as the result of a legal ruling, which will allow it to fund its $280 million in remaining capital expenditures for this year with cash on hand and give it some flexibility through a challenging period.
The second company is Africa Oil, which owns oil and gas properties in Kenya. RBC said the company is a possible takeover target, as its, CEO Ken Hill, has a track record for commercializing resources and harvesting value. In addition, light, onshore oil has significant appeal in a lower, but recovering, oil price environment, analyst Al Stanton says. He says the stock is worth C$4.27 per share ($3.54), 60% higher than its closing price Wednesday of C$2.62.
And then there's Faroe Petroleum, which has had success discovering oil and gas in the North Sea. Stanton expects the company to begin harvesting value next year by swapping stakes in its new discoveries for equity in producing fields and/or a carry through the Pil area development off the coast of Norway. He thinks the stock is worth 182 pence per share ($2.84), vs. 84 pence recently.
The firm has had some success with its list. The portfolio was up 9.6% in April compared with 9.1% for the S&P Global Energy Sector and up 22% since its February 2013 inception, vs. 2% for the S&P Global Energy Sector. One of RBC's ideas, BG Group, announced last month that it's being taken out by Royal Dutch Shell (RDS.A) for $70 billion, leading the firm to take it off its list.
Other stocks on the list: Suncor Energy, the only integrated name; Tamarack Valley Energy, Whitecap Resources and Storm Resources among Canadian E&P and oil sands stocks; Concho Resources (CXO - Get Report), Devon Energy (DVN - Get Report), Newfield Exploration (NFX) and Pioneer Natural Resources (PXD - Get Report) among U.S. E&P stocks; Teekay (TK - Get Report) and Energy Transfer Equity (ETE), two midstream companies; Parex Resources, another international E&P; Nabors Industries (NBR - Get Report), Patterson-UTI Energy (PTEN - Get Report) and Secure Energy Services from the oil services sector; Marathon Petroleum (MPC - Get Report) the only refiner; and Abengoa Yield (ABY), Electricite de France SA and Enbridge among utilities and infrastructure. All in all, a pretty worldly bunch.