What are we looking for?
With oil hovering near its low for 2017 and the Saudis and Russians extending their supply cuts, my associate Allan Meyer and I thought it would be interesting to evaluate selected oil and gas companies using our investment philosophy focused on safety and value.
We started with Canadian-listed oil and gas companies with a market capitalization of $1-billion or more, sorted from largest to smallest. Dividend yield is the annualized projected dividend per share divided by price per share. All companies on this list are projected to pay a dividend. Allan and I like to get paid while we wait for capital appreciation, and dividends generally reflect safety and stability.
Then we looked at leverage using debt-to-equity. It's a safety signal; a lower number implies lower debt levels or leverage. We favour companies with little or no debt as it is difficult to go bankrupt without owing any debt obligations.
The price-to-cash-flow ratio is the current share price divided by the projected cash flow per share over the next year. It is a valuation metric; the lower the number, the better the value. In the oil and gas sector, cash flow is often considered to be more reliable than earnings-based valuation ratios because of the high level of costs related to non-cash items such as depreciation, amortization and deferred taxes within the sector. EV/EBITDA is also known as the "takeover multiple." It is the enterprise value divided by earnings before interest, taxes, depreciation and amortization. Again, a lower number reflects better value and takeover-candidate potential. We've included the average and median numbers to allow for better comparability amongst the list of names.
What did we find?
Crescent Point Energy Corp., Whitecap Resources Inc. and Torc Oil & Gas Ltd. look interesting as they score well across the board for safety and value factors. The BMO S&P/TSX Equal Weight Oil & Gas Index ETF (ZEO) may also be an option for those who like the sector but want to diversify away individual security risk. The exchange-traded fund's underlying holdings are similar to the equities we analyzed. It is important to note that the oil and gas sector can be cyclical and volatile; Allan and I tend to have a relatively small allocation to it in client portfolios.
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, helping individuals, families and other investors.
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Canadian oil and gas stocks that offer safety
|Company||Ticker||Market Cap ($Bil)||Dividend Yield (%)||Debt/Equity (%)||P/CF||EV/EBITDA|
|Suncor Energy Inc.||SU-T||72.1||3.0||39.1||7.4||10.6|
|Canadian Natural Resources||CNQ-T||47.2||2.6||64.0||5.8||12.7|
|Imperial Oil Ltd.||IMO-T||33.5||1.6||20.9||9.1||14.4|
|Cenovus Energy Inc.||CVE-T||13.3||1.5||54.6||4.9||13.5|
|Crescent Point Energy||CPG-T||7.2||2.7||39.8||3.9||7.9|
|PrairieSky Royalty Ltd.||PSK-T||7.0||2.5||0.0||25.2||32.1|
|ARC Resources Ltd.||ARX-T||6.4||3.3||29.4||7.9||11.6|
|Vermilion Energy Inc.||VET-T||5.8||5.3||87.5||8.8||13.9|
|Whitecap Resources Inc.||WCP-T||3.7||2.8||24.7||6.3||6.5|
|Birchcliff Energy Ltd.||BIR-T||1.8||1.4||32.6||4.6||11.3|
|Freehold Royalties Ltd.||FRU-T||1.6||4.3||9.5||12.6||15.7|
|Torc Oil & Gas Ltd.||TOG-T||1.1||3.9||16.3||5.2||8.2|
Thomson Reuters; Wickham Investment Council