Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).
The six-week period covered in our latest Industry Price Performance rankings was a challenging time for the equity markets. The tech-heavy NASDAQ had a particularly tough time, declining about 5%, though the S&P 500 Index actually managed to eke out a modest gain.
From an industry perspective, a very distinct theme was evident during this stretch. Specifically, energy-related groups dominated. The Petroleum Producing Industry took the top spot on our best-performing list, advancing 8.5% over the past six weeks. Right behind it was Petroleum Integrated and Natural Gas (Diversified), which rose 7.8% and 7.6%, respectively. Not surprisingly, energy prices, particularly for natural gas, have gained ground during this stretch. Rounding out the top seven were Pipeline MLPs (6.9%), Oilfield Services (6.4%), Electric Utility-East (6.3%), and Oil / Gas Distribution (3.3%).
The market, on the other hand, looked to take profits in some of its recent favorites. Most notably, biotechnology stocks soared throughout much of 2013 and early in 2014, but have given back some of these gains recently, dropping 17.3% on average over the past six weeks. Heavy losses in Healthcare Information (14.9%), Internet (13.6%), and Entertainment (10.7%) also stand in stark contrast to the market-beating share-price advances produced in the year leading up to the latest six-week measurement period.
In looking for investment ideas, we are focusing our attention on the Petroleum Producers. Among these stocks, Anadarko Petroleum Corp. (APC) and Ultra Petroleum (UPL) were the best performers in the group over the past six weeks, with both rising roughly 20% in price. (Notably, the former’s advance was driven in large part by the market’s favorable reaction to the news of a $5.15 billion settlement regarding the company’s role in a bankruptcy case.) The share price of Canadian Natural Resources (CNQ.TO) was up a more-modest 13% during this stretch, but we think this equity’s prospects for healthy long-term price appreciation and rising dividend payments make it worthy of a closer look by investors seeking to increase their exposure to the energy sector.
Canadian Natural Resources produces and sells oil, natural gas, and natural-gas liquids. The company’s efforts are currently focused primarily on western Canada, which accounted for over 90% of its total production in 2013. CNQ also has sizable holdings in the North Sea and offshore Africa, though most of this (nearly 80% of proved reserves) is still undeveloped.
Canadian Natural produced an average of 671,000 barrels of oil equivalent per day in 2013, a modest increase of 3% from the prior year. As is the case at many energy companies, growth is being driven by oil and liquids, while management limits spending on lower-return natural gas projects. This will likely be the case again in 2014, as CNQ aims to accelerate overall production growth to 7%-14%. In particular, the company has big plans for oil sands operations, where volumes are likely to climb 25%-40%.
Notably, these gains exclude contributions from a recent addition to the portfolio. In April, the company spent C$3.125 billion to purchase various assets in western Canada from Devon Energy. The deal includes properties producing about 87,000 boe per day and should be accretive to earnings this year, while also providing the potential for sizable cost savings down the road. The transaction will push up debt levels, but the company’s strong balance sheet should be able to easily handle the additional leverage, with debt-to-total-capital likely finishing 2014 well within management’s 25% to 40% comfort zone.
Meanwhile, CNQ appears to be getting more confident in its cash-flow capabilities of its long-life, low-decline holdings. The company has increased its dividend in each of the past two quarters. The April payout of $0.225 a share represents an 80% increase since the October distribution. The rate of growth will undoubtedly moderate from this pace, though we think cash generation will improve enough to allow for dividends to nearly double again by 2017-2019. Solid operational execution, particularly at CNQ’s unconventional assets, will be critical to making this promising outlook a reality. The Horizon project, for instance, has endured its share of setbacks, most notably a 2011 fire that shut down production for a substantial chunk of that year. These operations now produce roughly 110,000 boe per day (about 15% of the company’s total output), and capacity is expected to reach 250,000 boe per day in 2017. Capital spending, on the other hand, should ease later in the decade, as development at Horizon, which now accounts for more than one-third of the company’s outlays, winds down.
Canadian Natural stock is a timely selection for the year ahead. It also provides a decent measure of current income, with a dividend yield of 2.2%, versus a median of 2.0% for all dividend paying equities in the Value Line universe. We like it, as well, as a long-term holding. Assuming commodity prices cooperate, the increases in production we envision over the next 3 to 5 years should support healthy price appreciation to 2017-2019, while also producing the cash flow necessary to increase the payout at a double-digit clip each year.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.