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What are we looking for?

West Texas Intermediate, the North American crude oil benchmark, fluctuated between US$57 and US$62 last week after the attack on Saudi Aramco, the world’s largest exporter of petroleum. The Saudi incident in and of itself will not revive the fortunes of Canada’s energy sector, but it did cause some stock prices of companies in the sector to surge, however briefly.

Amid global geopolitical tensions, today we look for Canadian companies involved in oil and gas production, extraction and distribution, with a focus on quality and sustainability.

The screen

We screen the domestic energy sector for companies by using the following criteria:

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  • Market capitalization greater than $2-billion;
  • A positive change in the 12-month net operating profit after tax (NOPAT) – a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  • A future-growth-value-to-market-value ratio (FGV/MV) between minus 50 per cent and 50 per cent, to exclude companies with exaggerated discounts or premiums. FGV/MV represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;
  • Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent;
  • Economic performance index (EPI) greater than 0.5 and growth in the 12-month EPI, which is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. For EPI, anything above one is favourable – the higher the figure the better.

For informational purposes, we have also included recent stock price, dividend yield and one-year price return. Please note that some ratios shown are based on an end-of-quarter reporting.

More about Inovester

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios and easily communicate investment decisions with clients through client-friendly reports.

What we found

Parkland Fuel Corp., an independent fuel retailing company, has the highest EPI on our list of 2.8. This means that for every $1 spent, Parkland makes almost $3 in revenue. Parkland meets both quality and growth characteristics. Quality is reflected by its high free-cash-flow-to-capital and rising EPI, and growth is shown through growing profits (NOPAT 12-month change). Furthermore, the company’s stock has barely shifted in the past 12 months – leading it to trade at a 49-per-cent discount, as indicated by the FGV figure.

Encana Corp., a company engaged in hydrocarbon exploration, is trading at a 15.3-per-cent discount. The stock lost more than 60 per cent of its value over the past 12 months, which included a dip in April after missing analyst expectations. It’s worth noting the company’s second-quarter free cash flow was positive, compared with negative free cash flow in the same quarter in each of the previous four years.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

CompanyTickerMkt. Cap. ($ Mil.)NOPAT 12M chg. (%)FGV/MV (%)FCF/Cap. (%)EPIEPI 12M chg. (%)Div. Yld. (%)12M Price chg. (%)Recent Price ($)
Suncor Energy Inc.SU-T65,722.30.635.
Canadian Natural ResourcesCNQ-T43,314.22.421.35.60.941.14.0-14.636.45
Imperial Oil Ltd.IMO-T27,604.
Inter Pipeline Ltd.IPL-T9,835.70.921.6-7.81.319.48.33.323.85
Encana Corp.ECA-T8,792.68.0-
Parkland Fuel Corp.PKI-T6,350.43.8-
Tourmaline Oil Corp.TOU-T3,933.83.1-21.0-1.20.617.92.5-33.214.46
Gibson Energy Inc.GEI-T3,390.64.427.6-
Enerplus Corp.ERF-T2,492.
Arc Resources Ltd.ARX-T2,413.92.7-3.7-2.10.623.99.4-52.26.83

Source: Inovestor for Advisors

Noor Hussain is an analyst and account executive for Inovestor Inc.

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