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What are we looking for?

Well-valued Canadian oil and gas producers with strong price performance.

After a very poor showing in the first six months of 2017, crude oil prices seem to finally have found a floor. In fact, the energy sector has had one of the strongest performances of all sectors over the past month. Analysts attribute crude's strength to a gradual balancing of supply and demand as U.S. rig counts have dropped and members of the Organization of the Petroleum Exporting Countries debate further output cuts. Canadian oil and gas stocks have seen their prices drastically reduced in the past year are now looking well valued and poised to rebound further.

The screen

We will be using Recognia Strategy Builder to search for Canadian oil and gas producers with strong operating margins, low debt and reasonable valuations.

We begin by setting a minimum market capitalization threshold of $1-billion to focus on larger, more stable and established companies in the sector. To find stocks that are already showing signs of upward momentum, we will screen for four-week price gains of 5 per cent or more.

We also wish to focus on stocks with reasonable valuations based on their forward price-to-earnings ratio. We will select only companies with forward P/E ratio of 25 or less. Next, we will look for producers with efficient operations as evidenced by their operating margin; only companies with operating margins of 10 per cent or more are considered. Operating margin is a measure of a company's profitability that shows how much profit a company makes on each dollar of revenue.

Finally, in light of an increasing interest rate environment, we wish to select companies with low levels of debt, that is, those with a debt-to-equity ratio of 1.5 or less.

More about Recognia

Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.

What did we find?

Topping our list is Parex Resources Inc., which focuses on oil production in the Llanos and Magdelana basins in Colombia. Parex hit a 52-week low in late August but has rallied strongly since. It is now up almost 26 per cent in the past four weeks – the highest one-month performance on our list.

Seven Generations Energy Ltd. has had a terrible 2017, down almost 35 per cent year-to-date in spite of a 12.2-per-cent rally in the past month. The sharp decline in the stock price this year has resulted in a very attractive valuation with a forward P/E ratio of just 13 (the lowest on our list).

Focusing in the Western Canadian sedimentary basin, Tourmaline Oil Corp. is a senior oil and gas producer and has the highest market cap on our list. Like many other companies on this list, 2017 has not been kind to Tourmaline investors with the stock down 26 per cent year-to-date. However, the stock has done well since hitting a 52-week low in late August and is now up almost 12 per cent in the past month.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.

Oil and gas producers with low debt, reasonable valuations

RankNameTickerMarket Cap. ($Bil)4 Wk Price PerformanceDebt-to-Equity RatioOperating Margin Trailing 12MFwd P/E RatioDividend Yield
1Parex Resources Inc.PXT-T$2.425.8%0.0025.6%18.60.0%
2Seven Generations Energy Ltd.VII-T$6.912.2%0.4827.7%13.00.0%
3Birchcliff Energy Ltd.BIR-T$1.711.5%0.3824.8%13.71.6%
4Tourmaline Oil Corp.TOU-T$7.211.9%0.2020.2%19.20.0%
5Enerplus Corp.ERF-T$3.013.0%0.4314.1%15.01.0%
6Raging River Exploration Inc.RRX-T$1.823.4%0.2222.2%21.10.0%
7Gran Tierra Energy Inc.GTE-T$1.219.6%0.2716.1%17.10.0%
8Peyto Exploration & Development Corp.PEY-T$3.710.3%0.7332.3%18.35.9%
9ARC Resources Ltd.ARX-T$6.412.5%0.2714.7%21.43.3%

Source: Recognia