You don’t have to be an adherent of peak oil theory to be bullish on oil and oil stocks over the next two, five, ten years. Simple math shows that the world’s energy needs are rising – even with the entrance of electric cars into the North American market. Individual stock investors are wise to have some exposure to this sector of the energy market.Another part of the reason I focus on these types of posts is that there’s a dearth of information for US investors on international stocks and their valuations. Since I keep up on analysis of the Canadian equities markets, I’m happy to share with you what I’ve learned. I’m not a financial advisor, however, so keep that in mind and use these as suggestions for further research only.
When I say “best,” I mean some mixture of both the largest, the companies with the most lucrative oil patch locations, and the stocks that are most often recommended by Canadian analysts specializing in this sector. Also note that all of these are mature oil producers and they all pay dividends. I’ve listed them here according to market cap.
Best Oil Stocks To Buy For 2011: Suncor (TSX: SU)
One analyst called this the “#2 go-to name” for foreign investors. Suncor is another solid management team with steady, if not spectacular, growth prospects projected ahead. They recently acquired Canada’s #2 gasoline company, Petro-Canada, which owned a large number of gas stations throughout the country. Market Cap: $55.3 billion. Yield: 1.1%
Suncor Energy Inc. is a growing, integrated energy company, strategically focused on developing one of the world’s largest petroleum resource basins – Canada’s Athabasca oil sands.
In 1967, Suncor made history by tapping the oil sands to produce the first commercial barrel of synthetic crude oil. Since then, Suncor has grown to four major businesses with more than 5,000 employees.When I say “best,” I mean some mixture of both the largest, the companies with the most lucrative oil patch locations, and the stocks that are most often recommended by Canadian analysts specializing in this sector. Also note that all of these are mature oil producers and they all pay dividends. I’ve listed them here according to market cap.
Best Oil Stocks To Buy For 2011: Suncor (TSX: SU)
One analyst called this the “#2 go-to name” for foreign investors. Suncor is another solid management team with steady, if not spectacular, growth prospects projected ahead. They recently acquired Canada’s #2 gasoline company, Petro-Canada, which owned a large number of gas stations throughout the country. Market Cap: $55.3 billion. Yield: 1.1%
Suncor Energy Inc. is a growing, integrated energy company, strategically focused on developing one of the world’s largest petroleum resource basins – Canada’s Athabasca oil sands.
- Near Fort McMurray, Alberta, Canada, Suncor extracts and upgrades oil sands into high-quality refinery feedstock and diesel fuel.
- In Western Canada, Suncor explores for, develops and produces natural gas.
- In Ontario, Suncor refines crude oil and markets a range of petroleum and petrochemical products, primarily under the Sunoco brand.
- In Colorado, Suncor’s downstream assets include a Commerce City-based refinery, crude oil pipeline systems and 43 retail stations branded as Phillips 66.
Suncor Energy (SU:TSX) is one of Canada's premier integrated energy companies. Suncor's operations include oil sands development and upgrading, conventional and offshore oil and gas production, petroleum refining and product marketing under the Petro-Canada brand (Annual Report 2009). Suncor's common shares are listed on the Toronto and New York Stock Exchanges.
Currently Suncor's stock price is trading close to its mid-point in the 52 week time range. It's last closing price was recorded at $34.32. It's 52 week low price was $27.44 and it's 52 week high price was $40.79.
Suncor Fundamental Valuation MetricsHowever, its relative valuation measures are higher than the industry average as illustrated below:
Suncor Valuation
Is the valuation justified?
Suncor has a strong recoverable resource base of 27 billion barrels of oil equivalent.
Suncor also has in place a debt retirement plan and is now in the process of divesting assets it inherited in the merger with Petro-Canada that do not support its core operations. The company expects to close most sales by the end of the year. The proceeds from these sales are expected to be around CAD $ billion 2 to 4 and are expected to be used in reducing the company's debt. Along these lines, Suncor recently announced that it has entered into an agreement to sell certain natural gas-heavy assets in west-central Alberta for C$235 million ($230 million) in cash.
With 84% of the value in Suncor coming from oil, rising oil prices are Suncor's strongest catalyst for growth. For the near future, the US Energy Information Administration forecasts oil price to average USD 80.06 in 2010 and USD 83.50 in 2011.
Best Oil Stocks To Buy For 2011: Encana (TSX: ECA)
Encana has been described as one of the “bluest of the blue-chips.” Its focus is unconventional oil and gas with strengths in clean energy production, although it is weighted to natural gas. However, it has the second-largest market cap of any Canadian oil company. Market Cap: $45.4 billion. Yield: 2.8%
EnCana is a leading oil and gas producer in North America, where the company's primary focus is on the development of resource plays and the in-situ recovery of oilsands bitumen.
Christina Lake In-situ oilsands, northeast Alberta, EnCana's largest potential oilsands project
Located in northeast Alberta about 120 kilometers south of Fort McMurray, Christina Lake has the potential to be EnCana's largest oilsands project. Pilot project work over the past five years has taken steam-assisted gravity drainage production, from six well pairs drilled into the McMurray formation, to a level that is expected to average 6,000 barrels of bitumen per day in 2006. A current expansion is expected to take production to about 18,000 barrels per day in 2008 and the project is targeted to grow to more than 250,000 barrels per day over the next decade.
| With a reservoir thickness of up to 150 feet of oil-bearing sands, Christina Lake is estimated by EnCana to have an unbooked resource potential of about 1.8 billion barrels of oil. Foster Creek In-situ oilsands, northeast Alberta, commenced commercial operations in 2001. Foster Creek is the quintessential resource play — a high-quality, unconventional resource with large potential and scalable, repeatable operations that enable the company to incorporate technical advances. |
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| Foster Creek produces from the McMurray formation of the Athabasca oilsands, and features a technology called steam-assisted gravity drainage (SAGD). We conducted a multi-year pilot project prior to starting commercial operations in 2001. In SAGD, horizontal wells are drilled in pairs — running parallel above one another about 17 feet apart. Steam is injected in the upper well to warm the bitumen and make it less viscous so it can drain to the lower production well bore. A critical SAGD thermal efficiency measure is the ratio between the quantity of steam injected and the quantity of oil produced. Our steam-oil ratio of 2.5 times is industry leading. With a high-quality reservoir and leading thermal efficiency, Foster Creek delivers excellent returns. Oil production averaged 29,019 bbls/d in 2005. In the fourth quarter of 2005, we completed the first stage of an expansion which added an additional 10,000 bbls/d of capacity. The second stage of the expansion, which is expected to add an additional 20,000 bbls/d of capacity, is expected to be completed around year-end 2006. In November of 2005, we announced that EnCana is developing plans to significantly expand production from its estimated 5 billion to 10 billion barrels of recoverable oilsands resources - assets that have the potential to reach a production rate of 500,000 bbls/d of oil per day in the next 10 years. |
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Best Oil Stocks To Buy For 2011: Imperial Oil (TSX: IMO)
Imperial Oil has not been getting as much attention lately, but is still clearly a major player rounding out the profile of the largest Canadian oil companies. Imperial has not only consistently won awards for being one of Canada’s top employers, but they actively work to improve their environmental record. The dividends are meagre, however. But the management team is considered solid, and if you can call an oil company “blue-chip,” this is as close as they get. Market Cap: $35.1 billion. Yield: 1.0%
Imperial Oil Limited was incorporated under the laws of Canada in 1880. It is an integrated oil company. It is active in all phases of the petroleum industry in Canada, including the exploration for, and production and sale of, crude oil and natural gas. The Company's operations are conducted in three main segments: Upstream, Downstream and Chemical. Upstream operations include the exploration for, and production of, conventional crude oil, natural gas, upgraded crude oil and heavy oil. Downstream operations consist of the transportation, refining and blending of crude oil and refined products and the distribution and marketing thereof. The Chemical operations consist of the manufacturing and marketing of various petrochemicals. The Company owns and operates four refineries. Two of these, the Sarnia refinery and the Strathcona refinery, have lubricating oil production facilities. The Strathcona refinery processes Canadian crude oil, and the Dartmouth, Sarnia and Nanticoke refineries process a combination of Canadian and foreign crude oil. In addition to crude oil, the Company purchases finished products to supplement its refinery production. Crude oil from foreign sources is purchased by the Company at market prices mainly through Exxon Mobil Corporation. It owns and operates crude oil, natural gas liquids and products pipelines in Alberta, Manitoba and Ontario. Its known brand names are notably Esso and Mobil. The Company's Chemical operations manufacture and market ethylene, benzene, aromatic and aliphatic solvents, plasticizer intermediates and polyethylene resin. Its major petrochemical and polyethylene manufacturing operations are located in Sarnia, Ontario, adjacent to the Company's petroleum refinery. The Company's competitors include major integrated oil and gas companies and numerous other independent oil and gas companies. All phases of the Upstream, Downstream and Chemical businesses are subject to environmental regulation pursuant to a variety of Canadian federal, provincial and municipal laws and regulations, as well as international conventions.IMO.TSX Revenue
As a value investing shop, we are interested in seeing how IMO.TSX's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 1.67x and the low end of the range at 1.09x.
With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for IMO.TSX of 1.49x is somewhat above its historical average. As such, the current Price to Sales ratio suggests a neutral share price forecast. In order for us to become more positive about IMO.TSX we would need to see a drop in the Price to Sales ratio of 7% given current sales per share levels in order to return to its historical weighted average.
IMO.TSX Cash Earnings
Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. IMO.TSX is significantly above their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for IMO.TSX, the current level of Cash Earnings compared to its historical levels helps identify where IMO.TSX is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 17.13 and a historical low Cash Earnings per share ratio of 11.35, an investor can relate where value becomes optimal.
Just recall that when a stock's price, as in the cases of IMO.TSX, is significantly elevated to the level of Cash Earnings being generated, the market has already priced in much of that value. For example, the historical average for IMO.TSX's Price to Cash Earnings ratio is 35% below the current ratio of 19.28. That is not an insignificant amount, and diminishes our overall outlook on IMO.TSX. However, you need to review several areas of a company's potential, and as management would point out, one metric is not the end-all-be-all of any analysis.
IMO.TSX Dividends
While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.
In IMO.TSX’s case, the estimated annual dividend is 0.40 resulting in a current dividend yield of 1.00%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from IMO.TSX against the historic high and low levels over the past 10 years. The highest dividend yield from IMO.TSX over this period was 2.47% while the lowest dividend yield was 0.61% With that range in mind, IMO.TSX’s current dividend yield is a full 35.24% below its median dividend yield historically. This is a negative from our perspective.
Best Oil Stocks To Buy For 2011: Talisman Energy (TSX: TLM)
An independent company since 1992, Talisman is headquartered in Calgary, Alberta. It has subsidiaries operating in the UK, Norway, Southeast Asia, and North Africa. Talisman is another reputable big-cap, oil-weighted stock with gas exposure. It’s also more likely to be a buyer rather than a target of a takeover. Market Cap: $18.6 billion. Yield: 1.2%
Talisman Energy Incis considered to operate in the Energy sector. They specifically operate in the Independent Oil & Gas business segment contained within the Oil & Gas - E&P industry.
Talisman Energy Inc. is a global, diversified, upstream oil and gas company, headquartered in Canada. Talisman's three main operating areas are North America, the North Sea and Southeast Asia. The Company also has a portfolio of international exploration opportunities. It is a Canadian-based independent oil and gas producers. Talisman's main business activities include exploration, development, production, transportation and marketing of crude oil, natural gas and natural gas liquids. It has a diversified, global portfolio of oil and gas assets. The Company believes this portfolio would provide growth from shale gas development in North America, project developments in Southeast Asia, and its international exploration portfolio. Talisman investigates strategic acquisitions, dispositions and other business opportunities on an ongoing basis, some of which may be material. The Company's activities are conducted in five geographic segments: North America, UK, Scandinavia, Southeast Asia, and Other. The North America segment includes operations in Canada and the United States. The Southeast Asia segment includes exploration and operations in Indonesia, Malaysia, Vietnam and Australia and exploration activities in Papua New Guinea. The Other segment includes operations in Algeria and exploration activities in Peru, Colombia and the Kurdistan region of northern Iraq.
TLM.TSX RevenueCash earnings is the most important factor in our analysis, but it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company's stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, TLM.TSX the high and low end of the Price to Sales per share ratios are 2.55x and 1.43x respectively.
Notice that TLM.TSX's current Price to Sales per share ratio is 2.55x, which is high enough compared with historical norms of TLM.TSX to cause some concern. The current Price to Sales per share is near the upper end of the historical range. In our eyes, this is a negative factor because it is more likely that it will return to the normal range than continue rising outside of the range. At current sales per share levels, we would need to see a decline in the Price to Sales ratio of 28% merely to return TLM.TSX to its historical average.
TLM.TSX Cash Earnings
Looking at TLM.TSX specifically in their Cash Earnings capabilities, Ockham views TLM.TSX as significantly above their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for TLM.TSX, the current level of Cash Earnings compared to its historical levels helps identify where TLM.TSX is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 16.60 and a historical low Cash Earnings per share ratio of 9.93, an investor can relate where value becomes optimal.
Just recall that when a stock's price, as in the cases of TLM.TSX, is significantly elevated to the level of Cash Earnings being generated, the market has already priced in much of that value. For example, the historical average for TLM.TSX's Price to Cash Earnings ratio is 204% below the current ratio of 40.37. That is not an insignificant amount, and diminishes our overall outlook on TLM.TSX. However, you need to review several areas of a company's potential, and as management would point out, one metric is not the end-all-be-all of any analysis.
TLM.TSX Dividends
A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company's inherent expectations.
Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from TLM.TSX against the historic high and low levels over an available data range. Because TLM.TSX has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In TLM.TSX’s case, the estimated annual dividend is 0.24 producing a current dividend yield of 1.35%. The highest dividend yield from TLM.TSX in recent history was 2.42% while the lowest dividend yield was 0.54%. TLM.TSX is not making us feel all that confident when their current dividend yield is below the historical median by 9.08%.
Best Oil Stocks To Buy For 2011: Crescent Point Energy (TSX: CPG)
This is by far the hot Canadian oil stock right now, but for good reason. Not only does it seem to have the best growth and production prospects over the next ten years, but it has the best location of reserves in both southwest and southeast Saskatchewan. I have yet to see an analyst have anything negative to say about this company. Take that for what it’s worth, but I’m just saying. One factor to consider is its small market cap relative to others in the sector. It also has an unusually high yield, perhaps owing to its recent conversion from income trust status. Market Cap: $5.7 billion. Yield: 7.8%
Crescent Point Energy Corporationis considered to operate in the Energy sector. They specifically operate in the Independent Oil & Gas business segment contained within the Oil & Gas - E&P industry. Through Crescent Point Resources Ltd. and other subsidiaries, explores for, develops and produces oil and gas in western Canada.
CPG RevenueAs a value investing shop, we are interested in seeing how CPG's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 8 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 5.94x and the low end of the range at 3.30x.
With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for CPG of 8.54x is well above its historical average. This means that CPG looks relatively expensive compared to its historical Price to Sales average, and thus it is more difficult to believe that there is significant price appreciation potential. In order for the stock to become more attractive, we would like to see a decline in the Price to Sales ratio of 84% just to return CPG to its historical average.
CPG Cash Earnings
Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. CPG is significantly above its historical average multiple of cash earnings as calculated by Ockham. Similar to our analysis of sales per share, Ockham looks at the last 8 years of cash earnings levels for CPG to identify where the current high and low price levels have been historically in relation to profit per share. Again, we utilize a weighted average methodology which relies more heavily on recent years of data. This weighted average framework provides us with an average high Price to Cash Earnings ratio per share of 18.82 and a 11.99 low over the same period.
Therefore, at the current price of 37.83 and a Price to Cash Earnings ratio of 4,770.83, CPG is significantly overvalued. This diminishes the attractiveness of CPG until we see either a significant increase in cash earnings or a decline in price. A decline of the Price to Cash Earnings ratio of 30869% is needed just to return to the historical cash earnings multiple.
CPG Dividends
A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company's inherent expectations.
Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from CPG against the historic high and low levels over an available data range. Because CPG has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In CPG’s case, the estimated annual dividend is 2.76 producing a current dividend yield of 7.30%. The highest dividend yield from CPG in recent history was 14.40% while the lowest dividend yield was 0.00%. Therefore, the current dividend yield of CPG is above the historical median by 1.36%. This is definitely a positive in our view.
Best Oil Stocks To Buy For 2011: Canadian Natural Resources (TSX: CNQ)
Canadian Natural Resources, Ltd.is considered to operate in the Energy sector. They specifically operate in the Independent Oil & Gas business segment contained within the Oil & Gas - E&P industry.
Canadian Natural Resources Limited was incorporated under the laws of the Province of British Columbia on November 7, 1973 as AEX Minerals Corporation (N.P.L.) and on December 5, 1975 changed its name to Canadian Natural Resources Limited. It is a Canadian based senior independent energy company engaged in the acquisition, exploration, development, production, marketing and sale of crude oil, NGLs, and natural gas production. The Company's main core regions of operations are western Canada, the United Kingdom sector of the North Sea and Offshore West Africa. It initiates, operates and maintains a large working interest in a majority of the prospects in which it participates. It focuses on exploiting its core properties and actively maintaining cost controls. The Company's business approach is to maintain large project inventories and production diversification among each of the commodities it produces namely: natural gas, light/medium crude oil and NGLs, Pelican Lake crude oil (14-17º API oil, which receives medium quality crude netbacks due to lower production costs and lower royalty rates), primary heavy crude oil, thermal heavy crude oil and SCO. Its operations are centered on balanced product offerings, which together provide complementary infrastructure and balance throughout the business cycle. Virtually all of the Company's natural gas and NGLs production is located in the Canadian provinces of Alberta, British Columbia and Saskatchewan and is marketed in Canada and the United States.
CNQ RevenueFor a long time, value investors have used the current share price relative to sales per share levels as an important valuation tool. We utilize a historical weighted average methodology that treats recent years more importantly in the calculation. When looking at CNQ through this framework, we can see that our weighted average historical high and low Price to Sales per share ratios over the last 10 years are 3.07x and 1.31x respectively.
Utilizing this range we can see that CNQ’s current Price to Sales per share ratio of 2.83x is high enough compared with historical norms of CNQ to cause some concern. The current Price to Sales per share is near the upper end of the historical range. In our eyes, this is a negative factor because it is more likely that it will return to the normal range than continue rising outside of the range. At current sales per share levels, we would need to see a decline in the Price to Sales ratio of 28% merely to return CNQ to its historical average.
CNQ Cash Earnings
As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of CNQ, Ockham views their current Cash Earnings as significantly above their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for CNQ, the current level of Cash Earnings compared to its historical levels helps identify where CNQ is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 17.05 and a historical low Cash Earnings per share ratio of 7.30, an investor can relate where value becomes optimal.
So what does this tell us about CNQ in particular? Basically, we would value the current level of Cash Earnings per share (which is at 14.25) as significantly overvalued. Just by looking at the last closing price of CNQ, which was 32.47, we can see that compared to the historical high Price to Cash Earnings levels we calculated, the market has already rewarded CNQ with a higher stock price. So basically, we don't view this level of Cash Earnings or stock price as compatible with a long term value at this point. Just remember, that does not mean that CNQ may not have other merits with which to find a good investment opportunity, it just means that we would prefer to see either an increase in Cash Earnings or a decrease in stock price before we would become bullish on this metric.
CNQ Dividends
A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company's inherent expectations.
Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from CNQ against the historic high and low levels over an available data range. Because CNQ has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In CNQ’s case, the estimated annual dividend is 0.23 producing a current dividend yield of 0.67%. The highest dividend yield from CNQ in recent history was 2.15% while the lowest dividend yield was 0.37%. With that range in mind, CNQ’s current dividend yield is a full 46.57% below its median dividend yield historically. This is a negative from our perspective.
