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What are we looking for?

With oil prices on the rise in 2019, and energy stocks making up a notable proportion of the Canadian market, a large part of the gains on the S&P/TSX Composite Index so far are thanks to the energy sector. Today we look for improving company fundamentals to see whether the recent price bump for many of these stocks is justified by their operations.

The screen

We screen the S&P/TSX energy sector for quality companies by using the following criteria:

  •  Market capitalization greater than $1-billion;
  •  Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a greater pace than the cost of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax (NOPAT) minus capital expenses;
  •  A positive change in the 12-month 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;
  •  Future growth value/market value (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 ratio 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.

For informational purposes, we have also included recent stock price, dividend yield, one-year return and the economic performance index (EPI), which is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company.

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Please note that some ratios shown are based on an end-of-quarter reporting.

More about Inovestor

Inovestor for Advisors is a research platform based on fundamental analysis specializing in the economic value-added (EVA) method. It helps advisers quickly identify attractive investment opportunities and easily communicate them to their clients through client-friendly reports. In addition, Inovestor allows investors to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts).

What we found

The largest company by market cap on our list is Calgary-based Canadian Natural Resources Ltd. The oil and gas exploration and production company offers a solid dividend currently yielding 3 per cent and has an excellent free-cash-flow-to-capital ratio of 7.6 per cent. In addition, Canadian Natural’s profits have increased in the past 12 months, which can be seen by the NOPAT change of 3.9 per cent. This rise in profits is also reflected in the EVA-change metric, which provides a support for a rise in stock price.

Parex Resources Inc., a Calgary-based company that’s actively engaged in crude oil exploration, development and production in Colombia, is experiencing one of the highest rates of growth in EVA, is generating the most wealth for its shareholders as measured by the EPI, and produces the highest portion of free cash flow.

Readers are advised to conduct further research before investing in any of the securities shown here.

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

CompanyTickerRecent Price ($)Market Cap. ($M)12M EVA Chg. (%)12M Price Var. (%)Div. Yield (%)12M NOPAT Chg.  (%)FGV on MV (%)EPIFCF/Capital (%)
Canadian Natural Resources CNQ-T36.89                                            44,723.2                               245.1 -16.03.03.933.90.87.6
Husky Energy Inc.HSE-T15.9                                            15,981.4                               433.0 -13.51.24.824.50.72.5
Encana Corp.ECA-T9.07                                               8,638.3                               438.7 -40.70.53.8-7.60.8-0.5
Inter Pipeline Ltd.IPL-T21.14                                               8,536.3                                 31.5 -10.48.70.331.31.11.6
Keyera Corp.KEY-T31.06                                               6,484.0                               136.3 -19.34.92.328.61.2-12.8
Vermilion Energy Inc.VET-T33.01                                               5,033.9                               422.3 -30.86.34.138.11.22.6
Parkland Fuel Corp.PKI-T37.55                                               4,994.1                               479.1 30.32.76.1-30.02.20.0
Seven Generations EnergyVII-T10.37                                               3,755.0                               680.8 -40.50.08.3-40.61.3-1.2
Parex Resources Inc.PXT-T20.79                                               3,231.5                           1,098.8 7.20.011.9-8.32.420.2
Crescent Point Energy Corp.CPG-T3.95                                               2,171.9                           1,398.9 -59.64.412.3-31.20.5-2.2
Whitecap Resources Inc.WCP-T4.74                                               1,974.0                               176.1 -50.73.94.015.20.52.5
Meg Energy Corp.MEG-T5.5                                               1,632.5                               287.3 -2.30.04.5-5.40.8-2.4
Baytex Energy Corp.BTE-T2.3                                               1,274.1                               846.1 -41.10.09.8-18.30.80.4
Gran Tierra Energy Inc.GTE-T3.03                                               1,185.8                           1,285.0 -9.10.013.7-36.10.7-3.7

Inovestor for Advisors 

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