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number cruncher

What are we looking for?

Attractive midstream energy companies.

"Midstream" refers to those companies involved in the transportation, storage and marketing of oil and natural gas.

These companies typically have lower correlation to the negative price movements of oil and gas, and also generally lower volatility than the broader upstream and downstream companies. My colleague Rob Belanger and I thought we would take a look at Bloomberg's North American Midstream sector.

The screen

Our companies had to be larger than $1-billion (U.S.) in market capitalization and we ranked them from the largest to the smallest.

The EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) is one of the most commonly used valuation metrics. We are looking for a low number. The enterprise value is composed of the market capitalization, plus debt, minority interest and preferred shares, minus cash and equivalents.

The net debt/EBITDA is a measurement of leverage that shows how many years it would take a company to pay back its debt if its net debt and EBITDA are held constant. We are looking for a low number.

The dividend yield had to be greater than 3 per cent, and we want to see high sales growth in the past 12 months.

Operating margin is a measurement of what portion of a company's revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating margin of 12 per cent, it means that it makes 12 cents before interest and taxes for every dollar of sales. We only included companies where the operating margin is greater than 5 per cent.

Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. A high number is favoured.

What did we find?

Three companies scored better than the averages in four of the six categories. Houston-based Spectra Energy operates across North America gathering and processing, transmitting, storing and distributing natural gas. Targa Resources, also headquartered in Houston, owns and operates a diversified portfolio of midstream energy assets. Calgary-based Inter Pipeline Ltd. owns and operates a diversified combination of energy infrastructure assets in Western Canada and northern Europe.

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.

Midstream energy stocks