Top 10 energy picks for 2011
Unless you've been profiting hand over fist with Pure Asset Trader's exemplary track record, here are more ideas on how to profit from energy in 2011.
"On the demand side, accelerating GDP in emerging market nations and rising inflation fears will funnel greater investment capital to target inflation hedges in the form of commodities, particularly oil. We remain bearish on natural gas due to improved technology and oversupplied storage weighing on price. We see no reduction in production levels until perhaps the second half of 2011, with increasing risk to the sector of consolidation and bankruptcies.
With our bullish bias to crude oil price, we look for producers that are highly levered to crude oil and have positive production growth in their upstream profiles for 2011. These are the companies that are positioned to benefit from higher crude prices in 2011 and accelerating demand going forward.
Here we highlight our top 10 picks.
At the top of our list is China's national oil producer, CNOOC. It is 71% state-owned and aptly named CEO, as in CEO of the energy world, and is up more than 51% year-to-date. Government owned, it has a lower cost of capital that has enabled it to make several significant acquisitions in 2010, and we don't think they are through yet. CEO currently has an 82% oil weighting in its production profile, and with 2010 acquisitions the company could easily grow production by roughly 10%-12% in 2011.
Coupled with crude prices on the upswing in 2011, and using a conservative oil price of $85 per barrel for 2011, CEO could grow 2011 earnings roughly 40% from 2010 to $22.10 per ADR, which would easily top consensus estimates. Using a crude price of $89 in 2011 will add about another $2 in earnings and roughly $1 billion in cash flow. Net cash flow (NCF) after capital spending and dividends could grow to roughly $3 billion, or $7.40/ADR. The company also boasts a strong balance sheet with debt to capital at about 13%, and net of cash at negative 2%.
MEG Energy is a bitumen producer based in Calgary, Alberta with shares traded on the Toronto Stock Exchange. We expect MEG's 2011 earnings to benefit from a full year in operation, a 3% increase in oil sands production lower operating costs per barrel, and expanding margins. With its strong balance sheet, a strategic partner in China's CNOOC owning 15%, debt-to-capital at 21% and net of cash at negative ~13%, we believe MEG is being underpriced by the market by roughly 30%.
The company is sitting on roughly C$1.4 billion in cash -- more than enough to meet its expected net cash flow deficit after capital spending of roughly ~C$600 million for 2011. It is in the growth mode, ramping up production for its next phase of expansion at Christina Lake, with expected start-up in 2013. Based on $85 oil in 2011, MEG's 2011 earnings should top consensus, reaching ~C$0.92 per share, up more than 150% increase from 2010. Should crude oil average $89 in 2011, MEG's earnings could go about 16% higher to ~C$1.06."