What are we looking for?
Oil and gas stocks that fit our "safety and value" philosophy.
The beaten-down energy sector caught our attention because of Suncor's recent hostile takeover bid for Canadian Oil Sands, and oil prices stabilizing in the per-barrel range of $40 to $50 (U.S.). My associate Allan Meyer and I evaluated oil and gas companies using criteria that focus on both safety and value.
The screen
We started with Canadian-listed oil and gas companies with a market capitalization of $2-billion (Canadian) or more. All companies on the screen are projected to pay a dividend over the next year. We like to get paid while we wait, and dividends generally reflect safety.
- Price-to-cash flow is the current share price divided by the projected cash flow over the next year. It is an important metric for this sector and is preferred to earnings-based ratios because of the high level of costs related to non-cash items such as depreciation, amortization and deferred taxes within the sector. The lower the number, the better the value.
- EV/EBITDA is also known as the “takeover multiple”: It stands for enterprise value divided by earnings before interest, taxes, depreciation and amortization. Again, a lower number is preferred as it reflects value and potential as a takeover target.
- Lastly, we looked at debt-to-equity. A smaller ratio indicates a company has lower levels of debt and can be viewed as a sign of safety. It is difficult to go bankrupt without owing any debt.
We also included the BMO S&P/TSX Equal Weight Oil and Gas ETF. All data for the ETF are based on the weighted average of its underlying holdings.
What did we find?
Canadian Oil Sands Ltd.'s metrics have been bid up after Suncor Energy Inc.'s takeover offer. Prior to the takeover attempt, the shares were trading around $6 and reflecting much more value. Encana Corp. and Crescent Point Energy Corp. look interesting as their value measures are particularly attractive at their current prices. Crescent Point also looks interesting due to its low debt levels and its high dividend yield.
The ETF may also be an option for those who like the sector but want to diversify away individual-security risk.
Investors should contact an investment professional or conduct further research before buying any of the companies listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel Inc., helping individuals, families and other investors.