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What are we looking for?

Inspired by the recent takeover offer for Husky Energy Inc. by Cenovus Energy Inc., my colleague Allan Meyer and I thought we would analyze out-of-favour oil and gas producers using our investment philosophy focused on safety and value to potentially identify other opportunities. That said, it is important to note that this sector can be cyclical and volatile, and is for investors with a higher risk tolerance; we tend to target little 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 larger companies tend to be more stable and liquid.

Dividend yield is the annualized projected dividend per share divided by price per share. Dividends generally reflect safety and stability.

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Debt-to-equity is our final safety measure, a lower number implies lower debt levels or leverage and often lower relative risk.

Enterprise value-to-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. Unlike most common valuation metrics, it also considers the undertaking of debt by the acquirer. A lower number is preferred.

Price-to-cash-flow is the share price divided by the projected cash flow per share. 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 level of costs related to non-cash items such as depreciation, amortization and deferred taxes within the sector.

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

What we found

Parex Resources Inc., Seven Generations Energy Ltd. and Whitecap Resources Inc. generally score well for safety and value. Seven Generations boasts the best value according to price-to-cash-flow; Parex has the lowest enterprise value-to-EBITDA and the least debt. However, neither Parex nor Seven Generations pay a dividend while Whitecap has one of the highest yields. Husky Energy is among the least expensive names on both valuation metrics even after the recent share price jump from the takeover offer.

The BMO Equal Weight Oil & Gas Index 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.

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Select TSX-listed oil and gas companies

CompanyTickerMkt. Cap. ($ Bil.)Div. Yld. (%)Debt/Equity (%)EV/EBITDAPrice/CF52W Ttl. Rtn. (%)Recent Price ($)
Cdn. Natural ResourcesCNQ-T25.47.965.86.43.8-30.821.51
Suncor Energy Inc.SU-T24.75.242.76.43.9-57.416.22
Imperial Oil Ltd.IMO-T12.75.121.410.87.3-46.117.29
Cenovus Energy Inc.CVE-T5.50.044.910.74.0-59.84.47
Tourmaline Oil Corp.TOU-T5.02.620.96.33.667.918.47
Husky Energy Inc.HSE-T3.61.440.46.32.2-59.53.55
ARC Resources Ltd.ARX-T2.43.526.96.53.529.86.83
PrairieSky Royalty Ltd.PSK-T1.92.90.410.812.5-40.88.32
Parex Resources Inc.PXT-T1.80.00.12.23.6-29.113.06
Seven Generations EnergyVII-T1.50.039.03.71.8-40.84.56
Whitecap Resources Inc.WCP-T1.06.842.94.52.6-26.62.52
Average7.83.231.46.84.4-26.6
Median3.62.939.06.43.6-40.8

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

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

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