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Michael Bowman is a portfolio manager for Wickham Investment Counsel Inc. in Hamilton, Ont.

What are we looking for?

How Canada's oil companies stack up as potential investments.

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This is a timely issue given the recent takeover bid for Nexen by CNOOC Ltd. If a Canadian oil producer is an attractive target for a foreign acquirer, it seems reasonable that other producers may prove to be good buys for individual investors.

How we did it

My colleague, Sean Pugliese, and I looked at several factors to gauge the relative attractiveness of Canada's petroleum producers.

One key yardstick we examined was the recycle ratio, which is a company's profit per barrel of oil sold, divided by the total cost of discovering and extracting that barrel.

This ratio measures the efficiency of a company in turning a barrel of reserves into a barrel of production. If you spend $20 to get a barrel out of the ground, and get $60 profit for the barrel after paying all costs, then you are recycling your money three to one.

The higher the recycle ratio, the better, since oil companies are engaged in a constant struggle to replace the petroleum reserves they are depleting, at a reasonable cost.

Another key measurement is stock price to cash flow (P/CF), which evaluates the price of a company's stock relative to how much cash flow the firm is generating. We like this measurement because of its simplicity: Cash flow is simply how much cash a firm brings in during a given period. Unlike earnings and book value, cash flow is difficult for management to manipulate through aggressive accounting or depreciation methods. For purposes of our screen, the lower a firm's P/CF, the better.

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The screen also shows the one-year percentage growth in oil production per share. The higher this number, the better, since it indicates a firm's output is growing, not shrinking.

What did we find?

Only companies with a recycle ratio of 1.5 or greater are included in our list. No single company excelled in all the metrics we examined, but Suncor was above average in all of them. Its stock seems to merit a closer look.

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