What are we looking for?
Energy prices are soaring and some market pundits suggest there is still more upside to come. This sector is showing market leadership, being one of the few that has rallied as of late. Thus, 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 for investors to note that this sector can be cyclical and volatile; we tend to target very limited 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 smaller number is better and often implies 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 (a cash flow-like proxy). Unlike most common valuation metrics, it also considers the undertaking of debt by the acquirer. Smaller numbers mean a company is less expensive or better value.
We’ve included the 52-week total return to track performance and the average and median numbers to allow for better comparability amongst the group.
What we found
Parex Resources Inc. leads the way in several categories and one wonders if it is a takeover candidate. Whitecap Resources Inc., Paramount Resources Ltd., Crescent Point Energy Corp. and Birchcliff Energy Ltd. also look interesting on most measures. Freehold Royalties Ltd. has the highest dividend yield. In general, the sector seems to offer inexpensive valuations, light debt loads and posted stellar returns over the past year. The BMO Equal Weight Oil and Gas Index ETF (ZEO) and iShares S&P/TSX Capped Energy Index ETF (XEG) are options 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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