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number cruncher

What are we looking for?

Inspired by a recent client call regarding potential opportunities in Canada's oil and gas sector – with some producers are repurchasing their shares and the recent disconnect between the price of oil and the shares of producers – my associate Allan Meyer and I thought we would evaluate these companies using our investment philosophy focused on safety and value.

It's important to note this sector can be cyclical and volatile; we tend to give it a relatively small allocation in client portfolios.

The screen

We started with Canadian-listed oil and gas companies with a market capitalization of $1-billion or more, sorted from the largest to the smallest. This can be viewed as a safety factor, as larger companies tend to be more stable and liquid.

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. Mr. Meyer and I like to get paid while we wait for capital appreciation, and dividends generally reflect safety and stability.

Debt-to-equity is another safety measure: A lower number implies lower debt levels or leverage. As we like to say, it's difficult to go bankrupt without having any debt obligations.

Price-to-cash-flow is the share price divided by the projected cash flow per share. 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 known as the "takeover multiple" because the metric takes into account a company's debt as well as its equity as one sizes up takeover candidates. It is the enterprise value divided by earnings before interest, taxes, depreciation and amortization. A lower number is preferred.

We've included the 52-week total return to track performance, as well as the average and median numbers to allow for better comparability among the names.

What did we find?

Crescent Point Energy Corp., Peyto Exploration & Development Corp. and Tourmaline Oil Corp. look like value plays and score well on most other measures. Husky Energy Inc. and Whitecap Resources Inc. also look attractive, and it should be noted Husky is one of only two names with a positive total 52-week total return (Suncor Energy Inc. is the other). The BMO S&P/TSX Equal Weight Oil & Gas ETF (ZEO) is 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, helping individuals, families and other investors.

Select oil and gas companies

CompanyTickerRecent Price ($)Market Cap ($Bil)Div. Yield (%)Debt/Equity (%)P/CFEV/EBITDA52W Ttl. Rtn (%)
Suncor Energy Inc.SU-T42.0569.23.434.
Canadian Natural Resources Ltd.CNQ-T38.9247.83.471.05.09.2-8.4
Imperial Oil Ltd.IMO-T34.3428.31.921.38.512.3-16.2
Husky Energy Inc.HSE-T17.4817.11.833.
Encana Corp.ECA-T14.3313.70.687.95.38.1-1.4
Cenovus Energy Inc.CVE-T10.8713.01.947.65.09.5-35.3
PrairieSky Royalty Ltd.PSK-T26.816.
Tourmaline Oil Corp.TOU-T19.925.31.621.44.05.2-32.6
Vermilion Energy Inc.VET-T39.964.96.483.47.010.3-14.7
Crescent Point Energy Corp.CPG-T8.834.
ARC Resources Ltd.ARX-T12.854.54.724.85.96.7-31.6
Enerplus Corp.ERF-T14.003.50.842.07.17.830.4
Whitecap Resources Inc.WCP-T7.673.
Peyto Exploration & Development Corp.PEY-T10.
Freehold Royalties Ltd.FRU-T12.
Torc Oil & Gas Ltd.TOG-T6.291.23.917.54.86.8-6.2

Source: Thomson Reuters and Wickham Investment Counsel Inc.