What are we looking for?
Inspired by the recent strength in the price of oil, my associate Allan Meyer and I thought we would analyze oil and gas companies using our investment philosophy focused on safety and value. It’s important to note that this sector can be cyclical and volatile; given our investment focus, we tend to have a relatively small allocation to it in our client portfolios.
Dividend yield is the annualized projected dividend per share divided by price per share. All companies on this list are projected dividend payers. Our clients like to get paid while they wait for capital appreciation, and dividends generally reflect safety and stability.
The debt-to-equity ratio is another safety measure, a lower number implies lower debt levels or leverage and often lower 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. It is a valuation metric, but 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. 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.
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 group.
What we found
Frontera Energy Corp. scores well for safety and value, while Birchcliff Energy Ltd., Encana Corp. and Whitecap Resources Inc. also look attractive on most measures. Vermilion Energy Inc. is the highest-yielding name but also has some of the highest debt levels.
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 below.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.