What are we looking for?
Canadian energy stocks with strong profitability and improving momentum as oil prices surge above US$100 per barrel.
The S&P/TSX Capped Energy Index has gained more than 34 per cent year-to-date, driven by surging crude prices after the Iran-U.S. conflict disrupted shipping through the Strait of Hormuz. Against that backdrop, today’s screen focuses on financially sound Canadian energy companies that combine consistent profitability, disciplined capital allocation and meaningful dividend income – qualities that matter not just when commodity prices are rising, but when they eventually pull back.
The screen
We used Trading Central’s Strategy Builder to identify Canadian-listed energy companies that combine strong fundamentals with positive price momentum. Our universe was restricted to companies with market capitalizations above $2-billion to ensure sufficient liquidity for a broad range of investors.
To target profitability and capital efficiency, we screened for companies with a return on capital of at least 8 per cent, a threshold that approximates the cost of capital for most Canadian energy producers, and operating margins of at least 10 per cent, ensuring candidates generate meaningful profit from their core operations before financing costs.
We further required a price-to-cash-flow ratio of at least five to exclude names trading at distressed or speculative multiples, and a dividend yield of at least 2 per cent to reflect a commitment to returning capital to shareholders. In total, 10 stocks met all of our criteria. (All figures are as of Wednesday’s market close.)
More about Trading Central
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide. Trading Central Financial Products offers rules-based, factor-driven exchange-traded funds designed to bring institutional-grade investment research directly to Canadian investors.
What we found
Topping our list is Peyto Exploration & Development Corp., a natural gas-focused producer operating primarily in the Deep Basin of west-central Alberta. With a market capitalization of $5.4-billion, the company stands out for the quality of its underlying business, posting the strongest operating margin in the screen at nearly 37 per cent and the highest return on capital at 13.2 per cent, reflecting disciplined cost management and efficient capital deployment. The stock trades at 11.4 times earnings and a price-to-cash-flow of six, while offering a dividend yield of 5.45 per cent, the second-highest in the screen. Peyto is also a current holding in the Trading Central Quant Canadian 50 Index ETF (TCCA-T), a rules-based Canadian equity fund driven by Trading Central’s Quantamental Rating methodology.
Parex Resources Inc. is a mid-cap oil producer with operations focused in Colombia, offering a differentiated geographic profile within the Canadian energy universe. It posts the highest dividend yield in the screen at 5.89 per cent alongside the lowest P/E at 10.3 and a price-to-cash-flow of just 5.1, making it the most attractively valued name on a pure earnings and cash-flow basis. Return on capital of 8.8 per cent and an operating margin of 21.6 per cent round out a fundamentally sound profile. The stock has gained 39.6 per cent year-to-date and has more than doubled over the past year, up 104 per cent. Parex is also a current holding in the Trading Central Quant Canadian 50 Index ETF (TCCA-T).
Cenovus Energy Inc. is Canada’s largest integrated oil and gas producer. At a market capitalization of nearly $78-billion, it is the largest name in the screen and the standout price performer, gaining 74.3 per cent year-to-date and nearly 128 per cent over the past year. The stock trades at 16.7 times earnings and a price-to-cash-flow of 8.5, with a return on capital of 11.8 per cent, an operating margin of just under 11 per cent, and a dividend yield of 2.1 per cent.
Trading Central Strategy Builder offers a back-testing capability to evaluate how well an investing strategy would have performed in the past. Using a five-year historical period with quarterly rebalancing, the screen described above generated a hypothetical annualized return of 21 per cent, compared with 12 per cent for the S&P/TSX Composite Index over the same period.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of investing in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.