The continued strength of the crude oil market throughout the very bearish (and wrong) predictions of most of the major wirehouse analysts informed most of my exploration and production plays over the past two years and made us a lot of money. In my view, however, most of the gains in the U.S. exploration and production stocks have already been booked. Given my continued belief in high and sticky crude oil prices, though, I have searched high and low for new opportunities, and I think I have found a small one in Canadian oil.
I have talked around the Canadian producers in several columns over the past six months, believing that the underlying strength in Canadian names would come from the continued development and production in the oil sands of the Athabasca. With a continued intransigence on the part of the White House to approve the Keystone pipeline (a move I had thought would be forced by now), those Canadian tar sands plays have been waiting for infrastructure build-outs to release their potential value.
I am not walking away from long-term recommendations such as Cenovus Energy (CVE), a leader in very old-school technology of oil sands extraction, but the really great money on Cenovus is still probably more than a year away. Perhaps the latest TransCanada (TRP) proposal on an Eastern pipe (Energy East) will be the key catalyst it needs.
Another obvious play has started to pique my interest, however, and I have begun accumulating in Canadian oil exploration and production names that have been buying up acreage in the Torquay region.
In many ways, this is a bit of an easy and somewhat unaggressive play. The Torquay is really just an extension of the Three Forks/Bakken shale play that drifts upward into Saskatchewan and has been less developed and therefore less hyped than the standard Bakken strongholds such as Continental Resources (CLR) and EOG Resources (EOG). The early results from the Canadian side of this play have been just as good, and two Canadian exploration and production stocks have been buying acreage in the Torquay hand over fist. One of them is Vermilion Energy (VET), and the other is Crescent Point Energy (CPG). I am bullish on and own the latter, which provides a more aggressive purchasing of acreage (with a $1.1 billion buyout of CanEra last month) and a very lovely 6.5% dividend that will soften the admittedly long wait time for a return on the investment.
While the development time will be long to ramp up the number of wells to make the Canadian Bakken look anything like the U.S. one, the lag time to getting a reaction from the stock should not be. In the shale plays, it has been very much a game of finding the potential to making big money in the shares -- by the time real production is online, most of the profit has been made already.
Numbers for the play already very much mimic what was seen in early development in North Dakota -- that is, a very reasonable sinking cost of about $3 million per well, with an average pay of 250,000 barrels and an annual rate of return of over 300% a year.
These are all heady numbers that come from the company, and I take them with a grain of salt. It is, however, an already strong production company that can afford to push some serious capital into this new Canadian shale play and see what the results are.
If the results are anything similar to what EOG and Continental experienced south of the border, then the shares of Crescent Point are very cheap indeed. I would suggest serious consideration at $40.50.
