http://www.financialpost.com/Putting+focus/3382640/story.html

Like much of the market these days, Joanne Hruska remains concerned about the near-term direction of equities. However, the portfolio manager at Aston Hill Financial labels herself cautiously optimistic. Supporting this positive outlook is a solid set of second-quarter earnings results out of the energy sector in recent weeks, some interesting takeaways from conference calls, and good guidance numbers.

“So even though we are generally cautious, second-quarter results that are usually much weaker as a result of the spring breakup and lack of drilling, ended up coming in at record levels for some Canadian companies,” Hruska says. However, she is still keeping a close eye on the economic situation.

Hruska believes stocks move on three factors: The macro environment, the health of the oil and gas sector itself, and what individual companies are doing. She gives each element a similar weighting in the decision-making process, also paying close attention to valuation. These factors also dictate what proportion of the portfolio is in cash.

The fund, which holds similar names to other sub-advisor mandates Hruska manages, can invest as much as 50% in U.S. and international names.

“We don’t see the need to overweight natural gas or oil right now. We like both commodities,” the manager says, noting that oil stocks have outperformed in recent years. In some cases, they got expensive enough to be sold.

The same holds true for some of the trusts and higher-yielding names, as well as stocks in unconventional oil plays like the Pembina Cardium or Bakken.

“There is lots of excitement surrounding all the drilling and all the money going into it,” she says. “We like them until they get really expensive.”

Hruska considers many natural gas stocks attractive due to their much cheaper valuations. The manager isn’t overly bullish, but feels like almost everyone is on the negative side of the trade.

“That could lead to some violent short-covering rallies at the minimum,” she says, pointing to recent data showing that China has surpassed the United States as the world’s biggest energy consumer.

“People need to make sure that they have some sort of exposure to the worldwide energy sector because it is not just limited to the United States as a major energy consumer anymore,” the manager says. “People knew it would happen one day, but they didn’t think it would happen this soon.”

The key question is where are emerging nations like China drilling and where are they spending on services?

“It will probably be outside North America,” Hruska says, “So investors with the right risk tolerance need to make sure they can take advantage of that.”

She says the fundamentals for natural gas remain bearish, despite a price rally about a month ago.

“It doesn’t look great, but with what is going on in the world and as people push for more gas, it is obviously not going to go away,” Hruska says.

“It’s only a matter of when it will recover. We need it — it’s clean fuel.”

The manager cites Canadian drilling activity in the second quarter, which came in much higher than the previous year compared to international activity, as a sign of good things to come.

“They are even drilling in Alberta, which nobody thought they would ever again after the royalty changes,” Hruska says.

So while natural gas may not be the trade of the month, she does see higher prices on the horizon. More of the demand for gas drilling is on the liquids-rich side these days because producers get more of an oil price on those liquids, which is significantly higher.

“There are some areas of northwest Alberta where the pools have a lot more liquids when they drill for gas, so people are a lot more active there,” the manager says.

She is also seeing good value in energy service companies, both in the United States and Canada, due to continued caution among investors.

BUYS

Encana Corp. (ECA/TSX)

This gas-weighted name has a market cap of roughly $23-billion. More of the stock was purchased for the fund recently around $30 per share.

“Their valuation levels are very attractive to us at this price,” Hruska says.

“Following the split with Cenovus, we feel that the focused operations will have a positive effect on the share price over time.”

The manager added that recent second quarter results were strong and the company increased its guidance for the rest of 2010.

“Cash flow in the second quarter was actually higher than the first quarter, which is rare for larger companies due to breakup,” Hruska says. “We also like their valuation versus their peer group and their debt is under control.”

NAL Oil & Gas Trust (NAE.un/TSX)

This company, which is owned in several of Hruska’s mandates, has a couple of really good oil resource plays, but remains about 50/50 oil and gas.

“They’ve expanded a lot in their Saskatchewan area recently, but they also have assets in the Pembina Cardium play,” Hruska says.

She sold her position when the stock climbed to about $15, but saw good value again when it traded around $10.

“We think they are a better company now. Nothing has really changed, but they have a lot more to do now compared to six months ago,” she says. “We feel investors can take advantage of the sell-off and think the valuation is good.”

NAL has no problems with debt and provides a 10% yield. While this yield will probably come down in 2011 when the trust coverts to a corporation, Hruska still likes the payout and growth prospects.

Bellamont Exploration Ltd. (BMX.A/TSX-V)

This much smaller name has a market cap of roughly $40-million and is about 60% natural gas.

“Ever since the crash, anything income related has gone up a lot and anything that is risky has gone down,” Hruska says. “Small cap energy has kind of been hit with a double-whammy, but there are a lot of good values out there, including Bellamont.”

She says with a price-to-cash flow multiple of around 3x, it is very cheap compared to the peer group.

Bellamont has no debt issues and is growing, due in part to a recent acquisition that puts it at almost 3,000 barrels a day of production.

“They are moving forward on some oil exploration, but they still have gas to explore for and develop as well,” Hruska says. “Once the world stops focusing on risk aversion, they should be trading at least a multiple point or two higher.

SELL

Macondo oil spill exposure

“I keep getting calls from brokers and investors asking me if is time to buy BP, Transocean, Anadarko or any of the players involved in the Macondo well,” Hruska says. “We are not buying into these yet since we feel that the future liability is too great.

“We don’t know what is going to come out of this,” she says.

“The US$20-billion fund could just be the beginning.”

While the manager admits she could be wrong, it is unclear what will come out of the woodwork in the coming weeks and months.

Instead, she suggests investors can take advantage of the many stocks that have fallen as a result of the BP oil spill in the Gulf of Mexico, but don’t have any direct exposure.

“We’ve done stuff like that,” Hruska says, noting the stocks she targets not only have low debt, but low liabilities.

Financial Post