2 Plays on Alberta’s Oily Frontier

06/14/2011 9:30 am EST

Focus: GLOBAL

Patrick McKeough

Editor, Successful Investor

Even though oil prices have fallen of late, crude remains expensive enough to spur these two drillers into a production boom that should feed and increase their growth and dividend potentials, writes Pat McKeough in Stock Pickers’ Digest.

Trilogy Energy Corp (Toronto: TET) owns oil and gas properties in the Kaybob and Grande Prairie areas of central Alberta. About 78% of Trilogy’s production is natural gas. The remaining 22% is oil.

In the three months ended December 31, 2010, Trilogy produced 21,544 barrels of oil equivalent per day (including natural gas), down 4.1% from 22,462 barrels a year earlier. Because of the lower production, cash flow rose just 3.6%, to 29 cents a share (from 28 cents a year earlier).

However, Trilogy continues to bring new wells into production. That should push up its average daily production to over 26,500 barrels a day in 2011.

The company’s total debt is now $279.6 million. That’s a low 15% of its market cap. Trilogy pays a monthly dividend of $0.035, which gives the shares a 1.8% yield.

Trilogy is forecast to report cash flow of $1.80 a share in 2011. The shares trade at 12.3 times that estimate.

Meanwhile, Zargon Oil & Gas (Toronto: ZAR) produces oil and natural gas in Alberta, Manitoba, Saskatchewan, and North Dakota.

Its output is weighted 62% to oil and 38% to natural gas. This diversification helps cut its risk.

In the three months ended March 31, Zargon produced 9,546 barrels of oil equivalent per day. That was down 5.1% from 10,062 barrels a year earlier. Because of the lower production, and a one-time tax adjustment, cash flow per share fell 33.3%, to 56 cents from 84 cents a year earlier.

Zargon recently raised $39 million in a share offering. That will let it raise its 2011 capital spending by $10 million, to $65 million.

In the latest quarter, the company drilled eight wells, with a 100% success rate. The drilling program consisted of four horizontal wells in the Williston Basin area of North Dakota, three more in the Alberta Plains South area, and one in the Alberta Plains North area.

Horizontal drilling involves drilling development wells sideways, or at an angle, to reach isolated pockets of gas, or to follow a reservoir spread out in a narrow layer. Horizontal drilling works well in situations where conventional drilling is either impossible or too expensive.

Zargon will also use some of the funds from its share issue to pay down debt. That will further reduce its current debt of $121.9 million, which is a low 19.8% of its market cap.

The company pays a monthly dividend of $0.14, which gives the shares a high 8.1% yield.

Zargon is forecast to report cash flow of $2.70 a share in 2011. The shares trade at 7.9 times that estimate.

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