What are we looking for?
Tariffs, war and a rising price of oil have changed the investing dynamics over the past six months. What will the consequences be for Canadian oil and gas companies’ stock prices and exports?
The screen
We used stockcalc’s screener to select the Top 10 listed oil and gas stocks by market capitalization on the TSX. We then used stockcalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
- An adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
- If we have analyst coverage, we may consider the consensus target price.
More about stockcalc
Stockcalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. Stockcalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to stockcalc using the promo code ‘Globe30,’ which offers a 30-day free trial and special pricing for the second month.
What we found
You can see in the accompanying table the percentage difference between each stock’s recent close price and its intrinsic value. The “stockcalc valuation” column is a weighted calculation derived from our models and analyst target data if used.
U.S.-Canada tariffs:
Despite the broader deterioration in trade relations, Canadian crude currently appears insulated from U.S. tariffs. Given many U.S. Midwest refineries are configured specifically for Canadian heavy crude, a tariff would raise costs for U.S. refiners and consumers. USMCA compliant Canadian goods retain important exemptions.
TMX Pipeline:
The Trans Mountain Expansion (TMX) has substantially improved Canada’s access to Pacific markets, reduced dependence on U.S. refineries and decreased the transportation related Western Canadian Select (WCS) discounts experienced historically. Canadian barrels have increased strategic value when Middle Eastern barrels become difficult or expensive to transport. Much Middle Eastern production is medium/heavy sour crude. Loss of those barrels can increase refinery demand for alternative Canadian heavy crude (shipped via TMX to Asian ports), narrowing the WCS discount at the same time WTI rises, a favourable combination for Canada’s oil-sands producers.
Strait of Hormuz:
Prior to the war, 20 million to 21 million barrels a day of petroleum moved through Hormuz, or one-quarter of global seaborne oil. If we were to see an agreement, we would expect a significant decline from current oil prices. A drop from $100 WTI toward $80 would materially reduce the windfall currently accruing for producers. Suncor Energy Inc. said every US$1/bbl increase in WTI adds approximately $215-million to annual Adjusted Funds from Operations (AFFO). Cenovus Energy Inc. has said the number is $220-million in AFF (Adjusted Funds Flow) for every US$1/bbl increase and WhiteCap Resources Inc. shows $US1/bbl WTI increase adds $50-million funds flow.
Let’s look at the companies. We can divide our list into three groups:
Companies with direct oil exposure: Canadian Natural Resources Ltd. CNQ-T, Suncor Energy Inc. SU-T, Imperial Oil Ltd. IMO-T, Cenovus Energy Inc. CVE-T, Whitecap Resources Inc. WCP-T and Ovintiv Inc. OVV-T Their AFF will move with the price of oil as shown above, barrels produced times price matters.
Tourmaline Oil Corp. TOU-T has more-than-75-per-cent natural gas production, so natural gas price times production matters.
Midstream companies: Enbridge Inc. ENB-T, TC Energy Corp. TRP-T and Pembina Pipeline Corp. PPL-T rely on volume which is indirectly affected by price, so we look at these companies with volumes moved (oil or natural gas) times contracted price.
All of these companies pay a dividend and many are held for the dividend stream they produce. The midstream companies have the highest yields for this group.
Investing involves risk. Stockcalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.