What are we looking for?
There is a high correlation between the price of oil and the stock price of energy companies. The price of oil is very much a supply-and-demand equation with changes such as electrification expected to curtail demand. Conversely, higher environmental, social and governance standards and less investment in production growth will limit supply. With that backdrop, are there firms in this industry presenting investment opportunities?
We used StockCalc’s screener to select the top 10 listed energy companies by market capitalization on the Toronto Stock Exchange. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which cash flow projections are discounted back to the present to calculate value per share;
- A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
- An adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio.
If we have analyst coverage, we look at the consensus target price.
More about StockCalc
StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30, which offers a 30-day free trial and special pricing for the second month.
What we found
You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from our models and analyst target data, if used. This group consists of energy companies engaged in crude oil and gas exploration, production, manufacturing and transportation, including companies that own and operate oil field pipelines or refine and sell petroleum and petroleum products. All of the companies on our list show as slightly undervalued (up to about 10 per cent), implying we see further upside for the industry.
The question for these companies’ stock prices, therefore, is where is the price of oil heading? Some will argue that, with the electrification of the automotive industry, demand for oil products will be reduced dramatically. New York State, for example, recently passed a law to ban the sale of fossil fuel-based vehicles starting in 2035. In fact, less than 40 per cent of oil produced in Canada is consumed as automotive gasoline, according to the Canadian Association of Petroleum Producers, with the rest split between diesel and jet fuel, heating oil, and various petrochemical products including plastics.
Let’s look at a couple of these companies:
Pipeline company Enbridge Inc. moves about 25 per cent of the crude oil produced in North America and transports 20 per cent of the natural gas consumed in the United States, according to its website. Enbridge was also an early investor in renewable energy and has a growing offshore wind portfolio. All of our models show the stock as undervalued. One risk to its price is the Line 5 proceedings continuing in Michigan, where the state is looking to close the line, a vital petroleum conduit for Ontario and Quebec. Enbridge is widely held for its dividend, yielding 6.6 per cent.
Keyera Corp. is a midstream energy business with natural gas operations in Western Canada. The company has a network of more than 4,400 kilometres of pipelines and 13 natural gas processing plants. Natural gas prices and Keyera’s stock have been rising steadily over the past month. Our models are on both sides of current stock price, which is not uncommon; the overall valuation is close to current price. Keyera is also held for its dividend, which yields 5.8 per cent.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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