What are we looking for?
Canadian oil and gas companies that are positioned to do well.
How we did it
Craig McGee, senior consultant at CPMS Morningstar Canada, did us the favour of scouring the CPMS Canadian database for 20 oil and gas stocks that met the following four criteria.
- They had an EV/EBITDA ratio less than 10. (EV stands for enterprise value – the value of the company’s stock and net debt. EBITDA is earnings before interest, taxes, depreciation and amortization. A low EV/EBITDA can indicate an undervalued stock.)
- They had estimated year-over-year growth in their cash flow for 2014 that was stable or positive.
- They had stable or positive revisions over the past three months to analysts’ consensus estimates for their cash flow for the upcoming year.
- They had quarterly cash flow momentum that was stable or positive. (QCFM measures how the percentage change in cash flow over the past four quarters compares with the same measurement from the previous quarter.)
The list is sorted lowest to highest on EV/EBITDA.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.
What we found
Mr. McGee tested the strategy by running a back test beginning in November, 2001, and re-selecting up to 25 stocks on a monthly basis. He found that the strategy would have posted an annualized total return of 36.3 per cent, while the TSX Energy Index came in at 11.8 per cent over the same period.
He also used Morningstar’s database to provide an “oil beta” for each stock on the list. This measures the performance of the share price relative to the change in oil prices over the past three years. A value higher than one suggests the stock has been more volatile than the price of oil; a value less than one suggests less volatility.
Investors who expect oil to rise may want to pay particular attention to the stocks with higher oil betas. As always, you should do your own research before buying any of the stocks listed here.
Oil & gas stocks posting cash flow growth
|1||Pacific Rubiales Enrgy||PRE-T||3.4x||17.80%||6.70%||5.70%||0.82|
|2||Bankers Petroleum Ltd.||BNK-T||3.9x||10.30%||7.30%||11.90%||1.98|
|3||AKITA Drilling Ltd., A||AKT.A-T||4.9x||12.00%||0.60%||18.10%||0.54|
|4||Novus Energy Inc.||NVS-X||5.3x||13.80%||0.00%||9.80%||1.32|
|5||Legacy Oil+Gas Inc.||LEG-T||5.5x||8.80%||1.50%||7.30%||1.04|
|6||Husky Energy Inc.||HSE-T||5.6x||3.90%||1.60%||3.70%||0.77|
|7||Xtreme Drilling & Coil||XDC-T||5.6x||19.00%||3.30%||10.20%||0.7|
|8||TriOil Resources Ltd.||TOL-X||5.7x||17.90%||1.10%||16.50%||1.63|
|10||Rock Energy Inc.||RE-T||6.1x||42.30%||23.20%||48.80%||1.46|
|11||Whitecap Resources Inc.||WCP-T||6.5x||6.40%||2.60%||3.80%||1.01|
|13||Vermilion Energy Inc.||VET-T||7.6x||2.30%||6.10%||3.80%||0.59|
|14||Crescent Pt Energy Corp||CPG-T||8.1x||2.70%||6.40%||6.20%||0.58|
|15||Artek Exploration Ltd.||RTK-T||8.6x||55.60%||0.70%||5.10%||1.46|
|16||RMP Energy Inc.||RMP-T||8.7x||56.80%||0.40%||6.00%||1.25|
|17||Baytex Energy Corp.||BTE-T||9.7x||3.00%||3.70%||9.20%||1.06|
|19||TORC Oil & Gas Ltd.||TOG-T||9.7x||14.40%||2.90%||18.30%||1.58|
|20||Mullen Group Ltd.||MTL-T||9.9x||18.50%||1.00%||2.50%||0.87|
Source: Morningstar Canada