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number cruncher

What are we looking for?

Oil and gas companies focusing on gas – and the transition to a cleaner energy mix.

The screen

Coal is the dirtiest of the fossil fuels in terms of emissions, and, sadly, burning coal is the world’s leading source of electricity generation. More encouraging, however, is that coal is losing ground to the second leading source – natural gas, the “cleanest” of all fossil fuels. Renewable sources such as wind and solar are preferable to natural gas and growing rapidly but until energy storage technologies improve, these sources are unreliable – the sun doesn’t always shine and the wind doesn’t always blow.

Natural gas will be important as the world transitions away from coal and oil, and demand will increase as governments around the world strive to meet their emissions commitments and consumer preference shifts to cleaner sources of electricity. We will look at the global oil and gas industry and try to identify those companies that would benefit from shifting demand toward the gas side of the business. Our universe is limited to energy companies with more than US$2-billion in market capitalization.

First, we look at forecast production of oil and gas for next year and screen for those where gas represents at least three-quarters in terms of the amount of energy available.

We also look at actual production for the past two years. By combining the forecast for next year and the actual results for the past two, we can see what the three-year change in the relative share of gas is. Companies that do not meet our criterion for the natural gas portion of forecast production (75 per cent or greater) can still be included if the change in the relative share of gas is 5 per cent or greater.

In addition to environmental sustainability, we consider earnings sustainability by looking at the cash-flow component of the Refinitiv StarMine Earnings Quality Model. The cash-flow component is a percentile score that ranks companies on cash flow from operations and capital expenditures as a percentage of average net operating assets (a higher ratio is positive for the former, negative for the latter) and we screen out any company below the 45th percentile.

More about Refinitiv

Refinitiv, formerly the financial and risk business of Thomson Reuters, is one of the world’s largest providers of financial markets data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv’s environmental, social and governance data use more than 400 metrics to cover companies representing more than 70 per cent of world’s market capitalization.

What we found

The universe for the screen was the global oil and gas industry, but except for BP PLC, only North American companies passed the screen. Of the two Canadian firms, Tourmaline Oil Corp. has the higher relative share of gas, at 81 per cent of energy produced. Analysts are bullish on Tourmaline’s recent transaction with Topaz Energy Corp. to create an $800-million private company, which could launch an initial public offering by mid-2020, according to RBC Dominion Securities. All 14 analysts covering Tourmaline rate it a buy or strong buy.

Arc Resources Ltd. appears at first glance to be an attractive pick for income-oriented investors with the highest forecast dividend yield and the second highest cash-flow score, indicating that this yield is sustainable. Experts covering the stock appear to agree. “We believe that the company offers low-risk exposure to higher natural gas prices, a sustainable dividend and longer-term upside," according to analyst Scott Van Bolhuis of Desjardins Securities.

Investors are advised to do their own research before trading in any of the securities shown below.

Select oil & gas companies

CompanySymbolCountry of Hdqtrs.Mkt. Cap. (US$ Mil.)% Gas, FY1% Gas, 3Y Chg.CF ScoreDiv. Yld., NTM1Y Rtn. (%)Recent Close *
Cabot Oil & Gas Corp.COG-NUnited States6,572100%4%712.5%-35.216.11
EQT Corp.EQT-NUnited States2,26899%0%491.4%-54.48.87
Tourmaline Oil Corp.TOU-TCanada2,84781%-11%493.5%-16.213.87
Arc Resources Ltd.ARX-TCanada2,00476%-4%627.5%-6.27.50
Devon Energy Corp.DVN-NUnited States8,89261%6%531.6%-10.723.15
Hess Corp.HES-NUnited States18,81647%5%471.7%22.061.75
BP PLCBP-LUnited Kingdom125,49244%7%576.6%-1.6471.25
Diamondback EnergyFANG-QUnited States13,44233%7%471.0%-16.183.78

Source: Refinitiv

* Recent stock price close shown in native currency.

Hugh Smith, CFA, MBA, is the director of Refinitiv’s ESG & investment management business for the Americas, and is a director on the board of the Responsible Investment Association of Canada.

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