What are we looking for?
At Lorne Steinberg Wealth Management, we are constantly on the hunt for value. Patient investors, like shoppers holding out for Boxing Day, can sometimes find incredible bargains by waiting for a sale on quality companies that have fallen out of favour.
Amid evidence of a supply imbalance in the oil industry, in the wake of slowing global demand and increased production from the fracking boom, oil prices have taken it on the chin and are down some 40 per cent since June to less than $60 (U.S.) a barrel. The slump in oil prices has been exacerbated by OPEC's recent move not to curb production, fuelling worries that many companies in our largest export industry may not be able to produce economically. According to the Canadian Energy Research Institute, existing projects require a price of around $85 a barrel to earn a reasonable return.
This has caused a sharp sell-off and a flurry of reviews and cuts in companies' dividend and capital expenditure plans. But the pendulum often swings too far in both directions and today we are "digging" for Canadian oil companies that have been punished the most, but that are also most likely to weather the downturn.
The screen
Using S&P's Capital IQ, my colleague Sam Oubadia and I screened for Canadian-listed companies in the oil and gas sector whose share prices have fallen substantially from recent highs. We further whittled the list down to focus on companies that are not laden in debt and, therefore, less reliant on capital markets (potentially affording them more runway should low oil prices persist).
Further, we also wanted to get a handle on each company's "netback," a measure of gross profit per barrel of oil (that takes into account expenses such as transportation, production and refining costs, and royalty fees). These metrics can help shed some light on a company's cost structure and ability to endure low prices.
We also screened for companies that did not command nosebleed forward earnings multiples. However, given the present circumstances, there are clearly risks that these valuations are "fluid" and will change from current levels.
What we found
The results can be seen in the accompanying table, which present a bit of mixed bag of integrated and exploration companies, with varying degrees of oil and natural gas production. Among the names, Suncor and Husky have relatively low debt ratios with comparatively good historical netbacks. Their shares have also held up better than some of the others. Baytex, on the other hand, has relatively high debt ratios and is one of the latest companies to cut its capital plans and dividends, along with Canadian Oil Sands. Shares of both companies have suffered some of the worst declines among the group.
The companies listed here are a good starting point for unearthing value, but numbers only tell part of the story. Investors are strongly advised to do their own research before purchasing any of the stocks listed here.
Brian Pinchuk is a portfolio manager at Lorne Steinberg Wealth Management in Montreal.