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number cruncher

What are we looking for?

My team member, Allan Meyer, recently attended the Canadian Association of Petroleum Producers (CAPP) conference hosted in Toronto by Bank of Montreal. He came back impressed. As a result, we decided to analyze oil and gas producers using our investment philosophy, which focuses on safety and value, and see what the numbers say. We’d also like to remind investors that this sector can be cyclical and volatile, so we tend to target very limited to no exposure to it in our client portfolios.

The screen

We started with Canadian-listed oil and gas companies with a market capitalization of $1-billion or more, sorted from largest to smallest. This is a safety factor, as large companies tend to be more stable and liquid than small ones.

Dividend yield is the projected annual dividend per share divided by the share price. Allan and I like to get paid while we wait for capital appreciation, and dividends generally reflect safety and stability. So, we limited our search to dividend payers.

Debt/equity is our final safety measure. A smaller number is better and implies lower relative risk. It’s difficult to go bankrupt if you have little or no debt.

Price/cash flow is the share price divided by the projected annual cash flow per share. It’s a valuation metric, and the lower the number, the better the value. In the oil and gas sector, cash flow is often considered more reliable than earnings-based financial ratios because of the high costs in the sector related to non-cash items such as depreciation, amortization and deferred taxes.

Enterprise Value/EBITDA is known as the “takeover multiple.” It is a measure of the company’s total value divided by earnings before interest, taxes, depreciation and amortization (a proxy that’s like cash flow). Unlike many common valuation metrics, it accounts for the undertaking of debt by an acquirer. Smaller numbers mean a company is less expensive (i.e. better value).

We’ve also included the 52-week total return to track performance, and the average and median numbers to allow for better comparability within the group.

What we found

Oil and gas stocks with strong dividends

CompanyTickerMarket Cap ($B)Div. Yld. (%)D/E (%)P/CFEV/EBITDA52wk. Ttl. Rtn. (%)Recent Price ($)
Canadian Natural Resources LtdCNQ-T87.84.534.
Suncor Energy IncSU-T56.94.839.73.82.810.943.01
Cenovus Energy IncCVE-T45.81.842.23.93.517.623.99
Imperial Oil LtdIMO-T42.62.418.56.33.817.772.85
Tourmaline Oil CorpTOU-T19.
ARC Resources LtdARX-T9.93.726.83.12.2-3.616.09
Whitecap Resources IncWCP-T6.55.437.
Crescent Point Energy CorpCPG-T5.63.924.12.32.419.610.18
Enerplus CorpERF-T4.51.424.
Vermilion Energy IncVET-T2.92.333.92.01.6-31.417.74
Parex Resources IncPXT-T2.
Topaz Energy CorpTPZ-T2.86.334.18.79.1-7.119.15
Tamarack Valley Energy LtdTVE-T2.33.656.52.53.9-11.54.12
Freehold Royalties LtdFRU-T2.
Peyto Exploration & Development CorpPEY-T2.210.641.92.52.5-4.912.41
Birchcliff Energy LtdBIR-T2.
Headwater Exploration IncHWX-T1.
Cardinal Energy Ltd (Alberta)CJ-T1.

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

Parex Resources PXT-T scores well for safety and value, and has the lowest EV/EBITDA ratio; one wonders if the company is a takeover candidate. Birchcliff Energy BIR-T also looks interesting. Vermilion Energy VET-T is the least expensive on both of our valuation metrics, while Peyto Exploration & Development PEY-T has the highest dividend and is attractively priced. Headwater Exploration HWX-T has almost no debt and pays a nice dividend. In general, the list offers attractive valuations, light debt loads and healthy dividend yields.

The BMO Canadian Oil and Gas ETF and the iShares Energy ETF are options for investors 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 or ETFs listed here.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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