What are we looking for?
If investors are thinking of buying an oil and gas stock, which ones should they consider.
The screen
We started with Canadian oil and gas exploration and production companies greater than $300-million in market capitalization.
The EV/EBITDA is the enterprise value (market value of debt plus equity minus cash) divided by earnings before interest, taxes, depreciation and amortization, and is one of the most commonly used valuation metrics. This ratio is used to find attractive takeover candidates because it includes debt that the acquiring company would have to assume. We are looking for a low number.
The Production/Share growth over the past year is the production growth over the past 12 months expressed as a percentage per share. Our companies had to have positive growth.
The Production Netback/BOE (barrel of oil equivalent) is revenue minus the production costs of oil and gas production, per BOE. We are looking for a high number.
The Recycle Ratio is another important measure of the profitability of an energy company. Oil and gas companies deplete their main asset, the reserves, and have to replace them. If a company spends $20 to get a barrel out of the ground, and receives $30 profit after all costs, then they are recycling their money at 1.5:1. We are looking for a high number, and we have sorted our companies from the highest to the lowest.
The Reserve Replacement Ratio is the percentage of a company's oil and gas reserves consumed by production during the year that were replaced. Our companies had to have a ratio greater than 150 per cent.
The Reserve Life indicates the average remaining life span of a company's assets. All our companies had to have a life span of more than five years.
The Interest Coverage is used to determine how easily a company can pay interest on its outstanding debt. The lower the ratio, the more the company is burdened by debt expense, and all our companies had to be greater than 1.5 times.
What did we find?
While all of these companies passed our strict screen, Bonterra Energy scored better than the averages in six of the seven categories. The company is a leading operator in the Pembina Cardium, the largest reservoir in Canada.
Investors should contact an investment professional or conduct further research before buying any of the companies listed here.
Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.