Surge Energy Inc (SGY.TO)

Oil/gas is very capital intensive. You spend a lot of money to drill holes in the ground. Every barrel of oil that you sell, you have to find another barrel of oil at an economic value. Having to pay out high dividends is an expensive proposition. Paying out more in dividends and its capital requirements, to maintain production at a flat level then it actually earns. The mere fact that the stock is yielding so much, tells him the company is fatiguing investors by buying assets and selling stock and paying out dividends. If you look at the stocks that have done well in the last 3 years, they are the ones that have been growing production and not paying dividends.

One way you can play this company to get it a little bit cheaper, is to Buy Longview (LNV-T), which they are acquiring. It probably trades at 1%-2% cheaper than the takeover price. The deal closes sometime in June. Likes the sustainability of the dividend on Surge and it’s in their DNA to grow the dividends through the years. Also, have some exciting plays in Saskatchewan. Dividend yield of about 8%.

Great management. 7%+ yield. Raised dividend 3 times. Are well ahead of plan on production. Lots of insider buying. Likes the growth.

They have a formula that works. Buy assets at a reasonable price and they produce assets, but they increase their payout. It should do pretty well.

Would look at Tourmaline (TOU-T) or Whitecap Resources (WCP-T) first. This is a great company and growing nicely, but prefers the above two. He looks for metrics that show it is improving relative to the peer group.

(Top Pick May 21/13, Up 54.61%) Growing a playbook of success and increasing the dividend over time. Manageable debt on the balance sheet. Marking a clear course to be the preeminent medium light oil dividend payer in Canada.

Likes it and thinks there is a lot of room to go. No hedges so could really increase in the last little while. Lots of insider buying recently.

Chart shows it is coming from a bottom in early 2013 followed by a consolidation and a new breakout. You want to have a Stop at about $5 with an expectation from there of some difficulties at around $9. This looks like a fairly decent opportunity. Use a Stop at about $6 and his expectation is somewhere around the $8-$9 range. Yield of 7.6%.

8.5% dividend. They have a low decline rate. Less than 100% of earnings go into dividends. Made a lot of acquisitions.

Buying Long View. Owned it on that expectation. One of the newer members of the group. 9% coupon.

Thinks there is room to go higher on this. Has an $8 target. Have changed over to a yield model. Yield of 8.8%.

A very interesting story. Has a very high yield of 8.9%. Its effective payout ratio, according to the company, is below 100% and they have low debt levels. Stock has gone nowhere but down for investors. Thinks this is because they bought all this production but they don’t have a lot of cash flow per share growth. Over the next couple of years, he believes they could make that cash flow growth somewhat positive, possibly 1.6% for 2014 and 2.5% for 2015. Feels the dividend is safe. (You can sell Calls against it.)

Thinks the 9.5% yield is sustainable as long as oil is in the $85-$100 range. It is in their DNA to try and bump their dividend once a year and they have done that this year already. He is looking for it to be in the $6.50 range 12 months out, maybe higher. An 8% 9% yield and 10% growth is a pretty compelling total return for a yield and growth type of investment. Just bought 19.9% of Longview (LNV-T) at around $4.40. A very strategic buy.

Stock has been weak over the past month because of their 19% acquisition of Longview (|LNV-T). They are hoping to do a merger. The street felt Longview didn’t have the greatest quality of assets and yet Surge had built its reputation on acquiring “elite” assets. His impression is that this is not as good a company as it was before because of the acquisition. 8.9% dividend is sustainable but the stock has lost a tremendous amount of momentum. Really doesn’t see this stock outperforming.

Bought a control piece of Long View, which he was waiting for. He thinks he is getting out of Long View through SGY-T. It will do a great job for the cash flows of SRG-T.