2014 is proving to be a year of resurgence for the Canadian energy sector, supported by strong commodity prices and a weaker Canadian dollar. Moreover, ample takeaway capacity and growing downstream heavy oil capacity should continue to provide support to heavy oil prices going forward. The sector is boasting clean balance sheets, supported by disciplined capital investments with a bias toward conventional oil and liquids-rich natural gas plays.
The Canadian intermediate E&P sector not only offers production growth and high dividend yields, it also provides investors exposure to the country's top oil and gas resource plays, including conventional light and heavy oil, oil sands, and liquids-rich gas plays. With the exception of a few names, the sector also boasts strong balance sheets. Due to the attractive sectorwide investment opportunity, companies with notable positions in key resource plays, stronger balance sheets, sustainable business models, and ability to delivery sustainable growth and income warrant premium valuations.
In my opinion, Baytex Energy (NYSE: BTE ) and Enerplus Corporation (NYSE: ERF ) are the best positioned stocks in the Canadian mid-cap E&P sector. Baytex is a premium name in the Canadian energy sector and is trading at a very attractive valuation. The company generates 80% of its production from three of the best plays in North America and is well positioned to deliver long-term growth in production and reserves. Enerplus, on the other hand, due to its conservative guidance, improved operational execution, and strong financial position has been a top performer among its peers over the past year. Despite all these factors, the company is trading at a discount compared to its dividend paying peers.
Baytex Energy Corporation
Baytex is a premium name in the Canadian heavy oil sector. It offers investors a high-quality asset base, strong balance sheet, and experienced management. The company recently announced that it will buy Aurora Oil & Gas (NASDAQOTH: AAGLF ) for $2.6 billion, including debt, to add production from the prolific Eagle Ford shale oil region of Texas. Aurora is an Australian company whose main assets are located in the Eagle Ford shale.
The takeover, which will require Australian and U.S. government approval, is proposed to be executed by scheme of arrangement, meaning Aurora shareholders will vote on it rather than sell the company to Baytex on market. According to a recent expert review by Grant Samuel & Associates, Baytex Energy's proposed takeover of Aurora Oil and Gas is in the best interests of the target's shareholders.
Baytex is better positioned than ever to deliver long-term production and reserve growth. Following the recent acquisition, the majority of Baytex's production will come from three key plays: Seal, Lloydminster, and Eagle Ford. These three plays will be the focus of the company's production going forward.
Enerplus, an independent oil and gas producer, has operations in Western Canada as well as in the U.S. Enerplus' strong financial position, conservative guidance, and improved operational execution have resulted in the company's stock outperforming its peers over the last year. Based on the company's guidance, it is expected to deliver 9% growth in production in 2014 and 7% growth in funds flow. Similar to its peer Baytex, the focus of Enerplus' capital spending is expected to be its key growth assets: the Bakken and the Marcellus.
Despite its strong profile and continued outperformance, Enerplus is trading at a discount compared to its dividend paying peers, as is the case with Baytex,. However, as the company delivers on its production and cash flow growth plans, it should serve to restore the market's confidence in the Enerplus story and the stock should outperform in 2014. Enerplus also offers healthy dividend yield of 4.8%.
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