Also, I am very conscious of risk. No security is risk-free of course, and
I define the potential problems with every security I pick so that readers
can make an informed judgment about whether the risk/return parameters are
acceptable to them.
However, although capital gains are not the main goal, this does not mean
we aren’t looking for bargains. That’s especially true in today’s market
where income-generating stocks have been bid up to sometimes precariously
high levels. Unless dividends have been increasing in lock step, which
rarely happens, the result is declining yields.
One of the few remaining sectors where there are good deals to be found is
oil and gas. These stocks rallied following the announcement of the Opec
production cuts, but prices have retreated again recently, and the TSX
Capped Energy Index is now in bear market territory, off 21.4% year to date
to June 30. A pullback of that magnitude suggests there should be some
decent opportunities available, so I did some investigating.
The stock I settled on is Calgary-based
PrairieSky Royalty Ltd. (TSX: PSK). Back in the summer of 2014, before the oil shock hit, you would have paid
over $38 per share and received a monthly dividend of $0.1058 ($1.27 per
year). Then came the plunge in the oil price, and the stock dropped all the
way to $17.81 in January 2016. The dividend was slashed by 43%, to $0.06
per month ($0.72 annually).
The stock rallied to the $34 range in December but then retreated again,
closing on June 16 at $29.44. At that level, I suggest the stock is worth a
First-quarter results showed a significant improvement in PrairieSky’s
financial position. Revenue rose 64% on a year-over-year basis, to $80.3
million, from $48.9 million in the same period last year. Funds from
operations were $67.3 million ($0.28 per share), up from $41.4 million
($0.18 per share) a year ago. Net earnings were $20.8 million ($0.09 per
share) compared with only $1.7 million ($0.01 per share) in 2016.
Production increased to 26,812 barrels of oil equivalent per day (boe/d) at
an average price of $30.45 boe/d. That compares with average daily
production of 23,081 boe/d at a price of $20.58 last year.
The company’s financial fortunes improved enough to allow for a small
increase in the dividend in March, to $0.0625 a month ($0.75 a year), for a
yield of 2.5%.
PrairieSky is somewhat unusual in the energy business in that it is not
actively involved in exploration and production. Rather, it leases land to
E&P companies in exchange for a royalty stream on oil and natural gas
production from the wells on its vast properties. This means the company
does not incur the exploration and production costs of conventional energy
producers although its profitability is still very much affected by
movements in the prices of oil, natural gas, and natural gas liquids. The
majority of its free cash flow is distributed to shareholders as dividends.
The company has one of the largest portfolios of fee simple lands in
Western Canada (“fee simple” means it owns the sub-surface mineral rights).
It has nine million acres across British Columbia, Alberta, Saskatchewan,
and Manitoba. Current activity is focused on the Viking light oil plays in
Western Saskatchewan and Alberta, the multi-zone Deep Basin fairway of
Alberta and British Columbia, and light oil deposits across Central
Alberta, including the Mannville area.
Management feels the shares are undervalued at the current price and is
actively buying them back on the open market. During the first quarter, the
company bought back 335,200 shares at a cost of $10.1 million. Last month
the company received TSX approval for a new normal course issuer bid to buy
back up to 1.6 million shares over the 12 months to May 4, 2018.
Another big attraction is that, unlike most energy companies, PrairieSky
has no debt and working capital of $97.6 million.
Although PrairieSky is not risky in the context of energy stocks in
general, as mentioned, it is vulnerable to movements in the prices of oil
and gas. So I rate this stock as higher risk. On the plus side, if oil
moves to US$60 a barrel in 2018, as some analysts are now predicting, we
should see further dividend increases and an upward move in the share
Ask your financial advisor if this stock is suitable for your portfolio.
Disclosure: I do not own shares of PrairieSky.
Gordon Pape is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investornewsletters, which are available through the Building Wealth website.
For more information on subscriptions to Gordon Pape’s newsletters,
check the Building Wealth website.
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Notes and Disclaimer
© 2017 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
financial, legal, accounting, or tax advice. Always seek advice from your
own financial advisor before making investment decisions.
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