What are we looking for?
So far this year, crude oil prices have strengthened by about 50 per cent, leading to a strong rally in the energy sector. As a result, my team member Allan Meyer and I thought we would analyze oil and gas producers using our investment philosophy focused on safety and value.
It is important to note to investors that this sector can be cyclical and volatile; we tend to target very little to no exposure to it in our client portfolios as a result.
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. Allan and I like to get paid while we wait for capital appreciation, and dividends generally reflect safety and stability. We limited our search to dividend payers as a result. Debt-to-equity is our final safety measure; a lower number implies lower debt levels or leverage and often lower relative risk.
Price-to-cash flow is the share price divided by the projected cash flow per share. It’s a valuation metric – 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. 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 considers the undertaking of debt by the acquirer (enterprise value factors in all debt). A lower number is preferred.
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
Suncor Energy Inc. and Parex Resources Inc. score reasonably well for safety and value. Parex also has the most attractive takeover multiple. Crescent Point Energy Corp. is inexpensive from a valuation standpoint while Freehold Royalties Ltd. has the highest yield. Topaz Energy Corp. is the only name on the list without any debt, but also has among the loftiest valuations.
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.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.
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