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This Oil Stock Has Been Blistering Hot, and Oil Prices Have Nothing to Do With It

By Matthew DiLallo - Oct 4, 2017 at 9:51AM

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A billionaire investor has gone all in on the Canadian oil stock.

Oil prices have quietly risen more than 20% off their bottom earlier this year, setting off a new bull market. However, while the rebound in oil has fueled rallies in many oil stocks, it wasn't the catalyst behind Pengrowth Energy's (NYSE: PGH) blistering run over the past month, where shares surged more than 90% at one point. Instead, what has fueled the Canadian oil stock's huge move was one investor, billionaire Seymour Schulich, who bought millions of shares in recent weeks in a bullish bet on its future.

Going "all in" by someone who knows how to find a buried treasure

While Seymour Schulich might not be that well known in investing circles, the Canadian has made quite the name for himself in the natural resources industry, especially mining. His claim to fame, and how he made his fortune, was pioneering the concept of royalty payments in the mining sector. He and a partner formed Franco-Nevada (FNV -0.81%) and used it to take the oil and gas royalty model to the gold mining industry. In their first deal, they paid $2 million for a 4% royalty on the output of a mine in Nevada. By 2002, that agreement was generating $23 million in annual revenue for Franco-Nevada. It's just one of a string of successful deals by the company, which Schulich eventually sold to Newmont Mining (NEM -2.51%). He made a mint for himself and his investors along the way, turning a $1,000 initial investment in 1983 into $1.2 million by 2002, which is good for a 40% average annual rate of return.

An oil well at with the sun behind it.

Image source: Getty Images.

Schulich has sought to continue compounding his wealth by making targeted investments. One of his largest at the moment is Pengrowth Energy, where he owns 130 million shares, which is good for a 24% stake in the oil producer. That's up from the 19% of the company he controlled in July after making a series of large volume purchases following his decision to go all in on his bold bet. In fact, he wrote in an email featured in a recent article in the Financial Post that "I wish I had more firepower" to keep buying shares, further stating that he will resume buying in six months when the current restriction on his ability to purchase the stock expires.

Why is Schulich so bullish?

Fueling Schulich's buying blitz is his belief that "oil prices are going up." While he's not alone in that view, his chosen vehicle to express that thesis, Pengrowth Energy, is an interesting one. The Canadian oil producer had been steadily sinking because of the weight of debt on its balance sheet. In fact, the company's financial situation is in such poor shape that it has unloaded 827 million Canadian dollars ($662 million) of assets this year and is in active negotiations with lenders to amend its credit facility, so it has more breathing room.

But while Schulich acknowledges that the company has issues, he's not concerned about its debt and expects that it will continue to sign deals to sell non-core assets as oil and gas prices rise, which will eventually get it back on solid ground. As that weight of debt lifts, it should ultimately drive the stock even higher.

In addition, he believes that the company has a hidden gem in its Lindbergh oil project in Western Canada. The oil facility's first phase continues to outperform expectations. Meanwhile, the company received regulatory approval for a second phase last year, which would more than double output. However, given its tight financial situation, it can't afford to move forward with that project at the moment, though the company believes it can eventually grow Lindbergh into a significant generator of steady oil production and cash flow. 

On top of that, the company controls a position in the hydrocarbon-rich Montney shale play, which the industry has called "the Marcellus Shale of the North" and "Canada's Eagle Ford Shale." One of the draws of the play, other than the hydrocarbon-saturated rocks, are the high returns drillers can earn on new wells in the region. Shale giant Encana (OVV -1.25%), for example, has 6,900 drilling locations in the Montney that can earn premium returns of 35% at $50 oil. Because of those returns, Encana expects to grow its liquids output from the play by a 30% compound annual growth rate through 2021. While Pengrowth isn't drilling there at the moment because of its tight financial resources, it has a vast inventory of locations that it could pursue in the future. 

Be careful before following this bull

Seymour Schulich has become wealthy making bold bets on commodities and doesn't doubt that he'll add to his riches by bolstering his gamble on Pengrowth Energy. But before piling in behind him, it's important to know that his motto is "often wrong, never in doubt." So while he has full confidence that oil will continue rising and take Pengrowth with it, that doesn't mean he won't be wrong. That's why investors shouldn't gamble any money on this oil stock unless they can afford to lose it, since there's a high risk that Pengrowth could continue struggling because it still does have a mountain of debt to address. 

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Ovintiv Inc. Stock Quote
Ovintiv Inc.
$49.55 (-1.25%) $0.63
Franco-Nevada Stock Quote
$167.01 (-0.81%) $-1.37
Newmont Mining Corporation Stock Quote
Newmont Mining Corporation
$43.53 (-2.51%) $-1.12

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