Daylight Shines Brightly as Output Gushes 

12/08/2010 2:35 pm EST

Focus: GLOBAL

Roger Conrad

Founder and Chief Editor, Capitalist Times

The Canadian energy producer is succeeding brilliantly at turning its investments into higher output and profits, writes Roger S. Conrad in Canadian Edge.

Natural gas prices are still languishing near their lowest levels since 2002. Nonetheless, there’s still plenty of money to be made on volume these days, if management has the right properties and execution.

The key for success: output. At a time when even oil prices are still 40% off their pre-2008 crash highs—and gas is less than a third of its high—drillers have returned to growth by focusing on production.

For producers, higher volume means improved economies of scale, which, in turn, drives down costs.

Daylight Energy (Toronto: DAY, OTC: DAYYF) posted a 79% increase in its third-quarter output of oil and gas. That spurred a 35% jump in funds from operations for the company, which converted to a corporation earlier this year. Management’s chief target: production of light oil and natural gas liquids, which soared 162% from year earlier levels.

Daylight is also squarely focused on boosting reserves, increasing them by 40% in the first nine months of 2010.

But its strategy differs from other Canadian gas producers in one major way: It’s focused on increasing light oil and gas liquids production, rather than gas itself.

That strategy has proven no less profitable in the near term. And it provides a nice cushion as well in case gas should remain at depressed levels longer than anticipated.

The company’s strategy in its early years was to take stakes in properties that majors were developing, in order to capitalize on the acquired geologic knowledge and experience without forking out capital as well. Now it’s squarely in the second stage of its development: focusing on a few choice areas and ramping up output.

That should continue to lift reserves, output and cash flow, which covered the distribution by better than 2-to-1 in the third quarter. And assuming it succeeds, management should begin to lift distributions as well sometime next year, provided oil prices remain steady to up-trending.

Daylight has fallen back since its conversion, presumably because investors were unhappy with the dividend. That’s placed it squarely on the bargain counter. Daylight Energy is a buy up to $11 for those who don’t already own it.

[Daylight converted from an income-tax-exempt trust to a corporation in May, cutting its monthly distribution from eight cents to five cents (Canadian) at that time. At the stock’s recent price of $10, its forward-looking annual dividend yield stands at 6%—Editor.]

[In September, Eric Roseman recommended two other Canadian energy plays. Conrad wrote about two trusts specializing in Canadian oil sands a month earlier. Gordon Pape recommended Daylight a bit more than a year ago, when it was 11% cheaper—Editor.]

Subscribe to Canadian Edge here…

Related Articles on GLOBAL