What are we looking for?
An oil company that will benefit from OPEC's newest strategy.
The Screen
Oil has been in a slump for some time now. There have been times in the past when the Organization of Petroleum Exporting Countries (OPEC), when faced with a low price environment, has agreed to put limits on production to inflate prices. However, since oil's crash in the summer of 2014, OPEC has appeared content to keep oil flowing despite low prices in order to protect market share. Its combined output is now at a record 33.6 million barrels per day (bpd). This was seen by many as an attempt to drive Texas shale drillers, who require a higher oil price to be profitable, out of business. Their strategy appears to be changing, though.
On Monday, OPEC's largest oil producer, Saudi Arabia, announced that an agreement to limit supply could be reached when the cartel next formally meets in November. At this point an invitation to join cuts could be extended to other countries, for example Russia. Vladimir Putin reacted to this by saying he believes in freezing, or even reducing oil production. Oil has already rallied on this news, and should continue to go even higher if these major producers do in fact come to an agreement. Back in Canada, we look for "upstream" oil explorers/producers who will benefit from this potential supply cut on the horizon.
Actual cash flow is very important in the oil production sector as companies are heavily indebted, and must constantly invest in exploration to replace their asset base and keep it from depleting. To find an attractively valued company we look for those with a price-to-cash flow ratio of less than 5.
Next, continuing in the search for a good value investment, we look at the value of a company relative to its production. Most Canadian companies involved in oil production also produce gas so we need an "apples-to-apples" production metric. We use barrels of oil equivalent (BOE) which combines both oil and gas into one measure. The metric we use for relative valuation is enterprise value/average daily BOE production. This is also referred to as price per flowing barrel, or PPFB.
Finally, to avoid the downside risk of investing in the smaller "nanocap" companies, we exclude any company whose market cap is less than $35-million.
More about Thomson Reuters
Thomson Reuters delivers trusted news and intelligent information to over 1 billion people in 140 countries every day. Our content, software and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class."
What did we find?
The screen yields eight companies, all with operations in Western Canada. Journey stands out for its significant insider ownership – five of the 10 largest shareholders are company officers (CEO, COO, VP). This is encouraging because it shows that those making decisions for the company have a lot of "skin in the game." Journey's potential has recently been recognized by institutional investors, often referred to as the "smart money." Alberta Investment Management (AIMCo), which is responsible for 26 pension and government funds in Alberta, just announced a $30-million private placement in Journey.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.