Domestic energy stocks have established a new post-crisis equilibrium in terms of valuation and, while the sector as a whole is not compellingly cheap, value opportunities are available.
The S&P/TSX Oil Producers Index is currently trading with an average price-to-cash-flow ratio of 5.46 times. That compares favourably to the pre-crisis average of 6.51 in 2006 and 2007. The sector saw hysterical swings in valuation levels between 2008 and 2011, climbing to 8.5 times in mid 2008 (cash flow began disappearing faster than stock prices fell as demand declined), falling to less than three times at the height of the global financial meltdown in 2009, before spiking again to nine times cash flow in 2011.
In aggregate, the sector is not at the once-in-a-generation, ridiculously cheap valuation levels seen in January 2009. But a look at the individual stocks underlying the Oil Producers index does show a number of companies trading well below their historical averages in terms of price to cash flow. The usual caveats apply – one valuation metric is not sufficient due diligence for investors and some of the stocks are cheap for good reasons – but this table should provide a solid start for further analysis.
The table shows all of the companies in the Oil Producers Index ranked by price to estimated cash flow for the next 12 months (compiled from analyst estimates by Bloomberg). The average ratio for the ten most attractive stocks by this measure is 3.3 times, not far from the where the sector was valued in January 2009.