What are we looking for?
With oil hovering around $50 (U.S.) a barrel, my associate Allan Meyer and I thought it would be interesting to evaluate select oil and gas companies with our "safety and value" investment philosophy in mind.
The screen
We started with Canadian-listed oil and gas companies with a market capitalization of $1-billion or more, sorted from high to low. All companies are projected to pay a dividend over the next year. We like to get paid while we wait and dividends generally reflect safety.
Price-to-cash flow (P/CF) is the current share price divided by the projected cash flow over the next year. It is an important valuation metric for the oil and gas sector and is preferred to earnings-based ratios because of the high level of costs related to non-cash items such as depreciation, amortization and deferred taxes within the sector. The lower the number, the better the value. As Allan and I like to tell clients, "We like value. We like to buy investments – or anything for that matter – when they're on sale rather than paying fair market value or a premium."
EV/EBITDA – also known as the "takeover multiple" – is the enterprise value divided by earnings before interest, taxes, depreciation and amortization. Again, a lower number reflects value and takeover candidate potential. (An "n/a" indicates a company has negative EBITDA.)
Lastly, we looked at debt-to-equity. A smaller ratio indicates a company has lower levels of debt and can be viewed as a sign of safety. It is difficult to go bankrupt without owing any debt. A number below 100 implies a company has enough equity to pay its debt obligations. Generally, we prefer 150 or less, but this varies across industries and sectors as many other metrics do.
What did we find?
Crescent Point looks interesting as its value measures are particularly attractive and it has low debt levels.
The BMO S&P/TSX Equal Weight Oil and Gas ETF (ZEO) may also be an option for those who like the sector, but want to diversify away individual-security risk. The ETF's underlying holdings are very similar to the equities we analyzed.
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.