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What are we looking for?

After the recent pullback in the natural-gas sector during a typically strong period of seasonality, my associate Allan Meyer and I thought it would be interesting to evaluate selected Canadian natural-gas companies using our investment philosophy focused on "safety and value."

The screen

We started with Canadian-listed natural-gas producers with a market capitalization of $1-billion or more, sorted from high to low.

Dividend yield is calculated as the projected annualized dividend payments divided by the current share price. We love to get paid while we wait for capital appreciation, and dividends generally reflect safety and stability. All companies must be projected to pay a dividend over the next year.

Price-to-cash-flow is the current share price divided by the projected cash flow over the next year. The lower the number, the better the value. Cash flow is often a preferred valuation metric over earnings-based measures because of the high level of costs related to non-cash items within the sector. Allan and I prefer forward-looking metrics for dividends and cash flow as we feel they more accurately depict the state of the natural-gas industry.

EV to EBITDA is also known as the "takeover multiple." It is the enterprise value divided by earnings before interest, taxes, depreciation and amortization. As value investors, Allan and I are always looking to purchase investments when they are "on sale." We look for a low takeover multiple.

Lastly, we looked at debt-to-equity. A smaller ratio indicates lower levels of debt and can be viewed as a sign of safety. It is difficult to go bankrupt without having debt obligations. A number under 100 implies a company has enough equity to pay its debt obligations. As always, it is important to note that metrics and their implications can vary across industries and sectors.

What did we find?

Bonavista Energy looks interesting as it shows attractive value and reasonable debt levels. The comparatively high debt levels on Enerplus should be noted.

The BMO Junior Gas Index ETF (ZJN) may also be an option for those who like the sector but want to diversify away individual-security risk. This exchange-traded fund invests in both Canadian and U.S. companies.

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.

Select natural gas stocks

CompanyTickerMarket Cap. ($Bil)Div. Yield (%)Price to CFEV to EBITDADebt to Equity (%)
Canadian Natural Resources Ltd.CNQ-T47.82.1%7.718.561.3%
Encana Corp.ECA-T13.00.6%7.816.186.5%
ARC Resources Ltd.ARX-T8.12.6%10.319.032.9%
PrairieSky Royalty Ltd.PSK-T6.72.4%28.441.00.0%
Vermilion Energy Inc.VET-T6.04.9%10.119.175.9%
Peyto Expl. & Dev. Corp.PEY-T5.63.9%8.317.164.4%
Enerplus Corp.ERF-T2.21.3%5.014.7136.3%
Freehold Royalties Ltd.FRU-T1.53.7%12.117.320.5%
TORC Oil & Gas Ltd.TOG-T1.43.1%7.815.617.7%
Bonavista Energy Corp.BNP-T1.10.9%3.310.781.7%

Source: Thomson Reuters, Wickham Investment Counsel Inc.