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Tim Murray: Light Oil Is the Next Big Play for Energy Stocks
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Source: George Mack of The Energy Report (5/31/11)
http://www.theenergyreport.com/pub/na/9719
 Light oil is the sweet spot for Jennings Capital Oil and Gas Analyst Tim Murray. He's finding plays that tap into pools via horizontal drilling. In this exclusive interview with The Energy Report, Tim talks about finding big growth stories that require investors to take on a bit more risk.
The Energy Report: Tim, how do you describe your universe of coverage?
Tim Murray: It's primarily small cap. So, I'm looking at market cap sub-CAD$500M, but we don't like to get much smaller than CAD$50M. In between, we're looking for themed ideas. The one theme that sticks out in my coverage universe is light oil. I call it my "tight light oil universe," where I cover a number of companies focusing on developing assets with horizontal multi-stage fracture stimulations. The other focus is liquids-rich natural gas, however my universe is much smaller here. I like to have a bigger company in my themes, and also a couple of small exploratory plays with a bit higher risk, but with bigger bang for your buck.
TER: Under-CAD$500M market cap means that small-cap mutual funds can buy in and still get doubles and triples out of companies starting at that size.
TM: Yep, no doubt about it. In the small-cap world, you're not looking for 5% or 10% returns. You're looking for meaningful returns. For higher-risk names, doubles and triples are possible. That's what investors want out of the space, but these smaller-cap companies also carry a higher risk rating.
TER: Why light oil?
TM: When I transitioned over to Jennings Capital back in December of '09, we didn't see any meaningful short- or medium-term reasons to be in the natural gas space. However, light oil, in our eyes, looked to be gaining momentum and the emergence of horizontal drilling and multi-stage fracks looked to be opening up a number of historic oil pools that had been developed vertically. Horizontal drilling had the potential to push pool boundaries and increase recovery factors. That's exactly what happened the last two years in the basin. We still see meaningful growth potential for the light oil space at $100 oil and even lower commodity prices.
TER: You have so many buy-rated names in your universe of coverage. Does this mean that there's a tremendous amount of value in small-cap oil and gas plays currently?
TM: The reason there are lots of buys in my universe is because we've got a pretty straightforward rating schedule. If my target price is over a 10% return, it must be a buy. As I mentioned earlier, in the small-cap world you need meaningful upside to justify the added risk so investors should really focus on my names with returns north of 20% and—for some of my riskier names—north of 50% would be ideal. I think there's a lot of value to be found among small caps if oil remains above $95 per barrel.
If you are of the belief that there might be some short-term pullback in the price of oil, then you've got to be a little bit more selective. What I'd be looking for are companies with good balance sheets in order to complete meaningful capital programs and lots of future running room upon success. I think the downside risk is minimal on most of my light oil names assuming we stay above USD$95/bbl oil as light oil-focused companies should generate meaningful cash flow and balance sheets should remain strong. The one wild card will be operational success and the market will reward the companies that demonstrate this.
TER: Best wishes, Tim. Thank you.
TM: Much appreciated.
Prior to joining Jennings Capital Inc. in December 2009, Tim Murray held the position as an Oil & Gas Analyst at Salman Partners Inc. and Northern Securities Inc. covering junior and mid-cap companies. Tim spent over a year at AltaGas Income Trust performing risk and credit analysis on the company's midstream business for natural gas and power assets. Prior to that, he was an Investment Advisor for three years. Tim obtained his CFA in 2003.
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