Best Stocks to Buy to Play this Energy Sector Reversal

The Canadian oil and gas industry has endured difficult conditions for the past few years and it is more than reflected in the share price of leading producers in that country.

It appears, however, we may have reached a point where a turnaround is imminent and investors can reap the rewards of this reversal if they know the best stocks to buy.

The problems facing Canadian energy companies have included a pricing differential in favor of the rest of the world, as well as roadblocks in getting their products to the marketplace.

Attempts to develop non-U.S. markets, build new pipelines and increase refining capacity have been met with strong opposition from environmental groups in Canada. Technological advances like fracking in countries like the United States have provided stiff competition for traditional methods and are far cheaper than oil sands projects that are a large part of the Canadian energy landscape.

There is a good chance that many Canadian oil and gas producers have reached what legendary investor John Templeton used to call the point of maximum pessimism.

But Canada is starting to take action to reignite the industry.

Why These Energy Stocks Face Brighter Future

Liquefied natural gas (LNG) terminals are being planned to allow Canadian producers to export to markets besides the United States. LNG is one of the fastest growing segments of the natural gas markets.

Industry experts at an event in Dubai Feb. 25 said LNG demand will rise by 4.6% annually over the next 15 years.

There also are discussions of increasing existing pipeline capacity to increase the flow of Western Canadian oil and gas production to eastern refineries.

Enbridge Inc. (NYSE: ENB), for example, is seeking permission to reverse the flow of its Number 9 pipeline to increase the flow of product to the refineries as well.

These changes create significant opportunities for long-term investors looking for energy stocks to buy now.

That's because the dismal operating environment has caused many Canadian oil and gas companies to sell at unreasonably cheap valuations.

Many trade for far less than the book value of their assets, a condition that is rarely sustained for a long period of time.

Sooner or later bargain hunters will push the share price higher or a competitor will step in to buy the assets on the cheap.

In addition, many of the Canadian energy companies pay large dividends and the decline in stock prices has made these stocks high-yield income alternatives for patient investors.

Best Stocks to Buy as Canada's Energy Industry Changes Course

Penn West Petroleum Ltd. (NYSE: PWE) is one of the largest conventional producers of oil and gas in our northern neighbor. It has the largest concentration of light sweet crude oil in Canada and a land base encompassing almost 6 million acres.

It has total reserves with a net present value of more than $9 billion according to a recent corporate presentation. In 2102 the company generated funds flow of $1.25 billion on daily production of the equivalent of 163,000 barrels of oil. Production was 65% oil and natural gas liquids which have a better pricing environment than natural gas.

Penn West has been disposing of non-core assets and last year sold $1.6 billion worth of properties and used the money to strengthen the balance sheet.

The stock is extraordinarily cheap at its current price, around $10. The market capitalization is about one-half of the net present value of the reserves and 70% of the tangible book value of total assets.

The shares currently yield 10% so investors get paid to wait for the Canadian oil and gas industry to improve.

Pengrowth Energy Corp. (NYSE: PGH) has been hit by the same concerns as other Canadian companies, but also has special circumstances that could lead to enormous appreciation in the share price.

The company is transitioning from traditional oil and gas to one that specializes in thermal production of oil, gas and natural gas liquids. In the interim, non-thermal assets will be used to sustain the dividend and invest in additional thermal production assets.

The company has targeted $700 million of assets for divestiture to fund the process and maintain the dividend payout. The current dividend yield is about 9% and the shares trade for about 70% of the tangible book value.

A successful transition to a low-cost stable thermal production company could easily lead to spectacular appreciation in the share price of Pengrowth Energy over the next three to five years. In addition, management has committed to maintaining the dividend of $.04 a month and stated they would reduce expenditures or sell additional assets before cutting the payout.

To read more about energy stocks to buy, check out this look at one of the companies making huge strides in positioning to profit from LNG.

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