3 Energy Plays for the Flood

09/06/2012 11:30 am EST


Curtis Hesler

Editor, Professional Timing Service

We're out of the summer doldrums and market activity should pick up...and one of the top sectors to watch is the energy patch notes Curt Hesler of Professional Timing Service.

My target buys for the month are in the energy sector. There has been a new wind in the news of late about “water flooding.” This is not a torture technique, but it’s an old and effective method of recovering more oil from old fields.

Basically, the process starts a couple of years after first drilling a well during what is called “secondary recovery.” Water flooding increases production after primary recovery has captured the investment of drilling and exploration.

Furthermore, water floods are inexpensive, and relatively riskless in that the geology and nature of the field are well-defined by this point in the production process. All in all, this technique is very profitable.

One of our recommended companies that is active in the Bakken and that started using water flooding some five years ago is Crescent Point (Toronto: CPG). We are moving the buy point up a little on this one to $38.75. The dividend is good at about 6.8%.

Water flooding takes some skill, of course, but Crescent Point has over the last five years developed many different combinations of water flooding coupled with fracking techniques, well spacing, and other factors to increase their recoverable reserves and profitability.

The only major you should own is Apache (APA). They are masters of all sorts of proprietary recovery techniques, and are very adept at taking over so-called played out fields and bringing them back to profitable production. I believe one reason the stock has languished here is their exposure to Egypt.

Most of their production is in North America, which is a godsend for our future domestic needs. There is a good deal of uncertainty concerning Egypt; but as time is playing out, it seems the military is still in control and is in need of foreign expertise.

They impress me that they do not think they can effectively run Egypt’s oil industry on their own, and they need the revenue. Hold Apache, with new purchases at $78 or less.

There is talk of carbon taxes again. That bodes well for Brookfield Renewable Energy Partners (Toronto: BEP.UN), now reorganized as a limited partnership. They produce electricity from many installations employing wind and hydro.

Bottom line: they produce electricity with no carbon footprint. If carbon taxes are enacted, traditional coal-fired (and to a lesser extent, natural gas-fired sources) will suffer paying higher taxes. These taxes, however, will simply be passed on to the consumer in the form of higher electricity rates. Brookfield will enjoy the higher prices as a consequence without having to pay extra carbon taxes.

We are raising the buy price a little to $28.50. As we see some profit-taking set in, we have a good chance of snagging a few shares at that price.

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