What are we looking for?
Canadian oil and gas companies that have a history of profitability.
My colleague Allan Meyer and I look at companies with a market capitalization larger than $1-billion.
In our screen, we show the growth, in percentage terms, of oil and gas production per share for the past 12 months. (Production per share is the annual growth of the number of barrels per day divided by the total number of shares.) It is one of several ratios used to determine the profitability of an energy company. We are looking for a high number.
The recycle ratio is another important measure of profitability. It equals the profit per barrel divided by the total cost of discovering and developing that barrel. Basically, it measures the efficiency of an energy company’s capital expenditure program. Oil and gas companies deplete their main asset, the reserves, and have to replace them, or eventually go out of business. If you spend $20 to get a barrel out of the ground, and get $40 in profit for the barrel after all costs, then you are recycling your money two to one. We are looking for a high number; a minimum of 2.0 (that is, a ratio of two to one) is acceptable. We have gone back five years to determine whether the company has a history of profitability.
What did we find?
Bonterra operates in the Pembina Cardium field, which is Canada’s largest reservoir. The company has shown a consistent recycle ratio of greater than 2.0 and has increased production 3.7 per cent in the past 12 months.
Birchcliff’s activities are concentrated in the Peace River Arch of Alberta. The company has increased the barrels per share by more than 15 per cent in the past 12 months, and has a stellar history of making profits.
Companies you may want to stay away from, based on the recycle ratio, would be Talisman, Enerplus and Paramount.
Peyto is an efficient explorer and producer of unconventional natural gas in Alberta with production growth of 18.5 per cent while Encana, another gas producer, has actually decreased production over the past year.
As always, investors should contact an investment professional or conduct further research.
Sizing up oil firms using profitability ratios
|Cdn. Natural Res.||CNQ-T||32.72||35,814|
|ARC Resources Ltd.||ARX-T||25.38||7,906|
|Penn West Petroleum||PWT-T||11.74||5,868|
|Peyto Explor. & Dev.||PEY-T||28.17||4,296|
Source: Bloomberg, Wickham Investment Counsel Inc.
|Cdn. Natural Res.||CNQ-T||32.72||35,814||-2.02||2.18||1.54||1.24||2.15||4.10|
|ARC Resources Ltd.||ARX-T||25.38||7,906||8.16||2.68||2.85||1.92||1.66||1.19|
|Penn West Petroleum||PWT-T||11.74||5,868||-2.91||8.62||1.44||1.60||7.89||5.60|
|Peyto Explor. & Dev.||PEY-T||28.17||4,296||18.52||1.94||2.35||2.33||5.02||3.41|
|Paramount Res -A||POU-T||32.64||3,142||3.55||0.34||0.26||0.28||0.34||0.68|
|Gran Tierra Energy||GTE-T||7.23||1,796||-5.44||4.56||3.36||4.07||5.31||0.68|