What are we looking for?
Canadian energy companies with higher revenue exposure to the United States than Canada.
The screen
Later this month, the Bank of Canada and the U.S. Federal Reserve will announce their latest decisions on interest rates. The BoC previously cut rates in May by one-quarter percentage point while the Fed left rates unchanged in June at between 5.25 to 5.5 per cent. If the BoC continues to lower rates while the Fed holds steady, it could lead to a devaluation of the Canadian dollar relative to the U.S. dollar. Consequently, Canadian companies with a higher percentage of revenue from the United States could gain a competitive edge against their peers. Moreover, companies selling energy products – Canada’s top export to the U.S. – could benefit greatly if demand increases because of a lower Canadian dollar. As such, we identified Canadian energy companies that could stand to gain from a weaker Canadian dollar using FactSet’s universal screening tool and applied the following parameters:
- Traded on a Canadian exchange;
- market capitalization greater than $1-billion;
- classified in the “utilities” or “energy minerals” sectors according to FactSet;
- greater revenue exposure to the U.S. than Canada, according to FactSet’s proprietary geographic revenue exposure algorithm.
- We ranked the six remaining companies using a multifactor ranking of financial ratios: cost of goods sold as a percentage of sales, net debt to EBITDA (earnings before interest, tax, and depreciation), asset turnover, price to earnings, and enterprise value to EBITDA. Given the high interest-rate environment, a company’s ability to effectively manage and meet its variable and fixed costs is paramount. Consequently, companies with a low cost of goods sold as a percentage of sales and a low net debt to EBITDA ratio are ideal. We also consider asset turnover – a measure of a company’s effectiveness in generating revenue from its assets, where a higher ratio suggests greater profitability potential with rising demand. Last, companies with lower valuation ratios, such as price earnings and enterprise value to EBITDA, are less likely to be overvalued, providing greater earnings potential for early investors.
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What we found
Of the six companies that passed our screen, the top two are highlighted below:
Cenovus Energy Inc., CVE-T an oil and natural gas company, ranked first in our screen with nearly equal revenue exposure to the U.S. and Canada at 49.7 and 48.1 per cent, respectively. Cenovus also boasts the lowest PE ratio and EV/EBITDA ratio among the companies passing our criteria, at 10.3 and 4.9, respectively (not shown). In the first quarter, the company returned a total of $436-million to shareholders in the form of share repurchases and dividends. Investors can look to next month’s second-quarter earnings on Aug. 1 for further insights into the company’s financial health.
MEG Energy Corp., MEG-T an oil producer and distributor, ranked second in our screen with 3.5 times more revenue exposure to the U.S. than in Canada at 78 per cent and 22 per cent, respectively. Compared with other energy companies in our screen, MEG had the second lowest valuation metrics with a PE ratio of 11.9 and an EV/EBITDA ratio of 5.3 (not shown). Last quarter, the company issued $127-million in share repurchases. Investors can learn more about MEG’s future plans in its second-quarter earnings release on July 25.
Disclaimer: The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.
Christine Elegado is a consultant at FactSet Canada.