What are we looking for?
The International Energy Agency has predicted that the United States will be the world's largest oil producer by 2015. Since my colleague Rob Belanger and I believe a wave of consolidation might hit the North American oil industry, today we are looking at Canadian oil companies in a way that an acquiring company might look at them.
We started with Canadian companies larger than $500-million in market capitalization.
One of the most commonly used valuation metrics is enterprise value (market value of equity plus net debt) divided by earnings before interest taxes depreciation and amortization (EV/EBITDA). This ratio is used to find attractive takeover candidates since it includes debt that the acquiring company would have to assume. We are looking for a low number.
The price to cash flow (P/CF) evaluates the price of a company's stock relative to how much cash flow the firm is generating. Cash flow is simple – how much cash a firm brings in during a given period. In our screen, the lower number is better.
Barrels of oil equivalent (BOE) production growth over the past 12 months is expressed as a percentage per share. Our companies had to have growth greater than 5 per cent.
The recycle ratio is another important measure of the profitability of an energy company. It measures the efficiency of a company's capital expenditure program. Oil and gas companies deplete their main asset, the reserves, and have to replace them. If you spend $20 to get a barrel out of the ground, and get $40 profit after all costs, then you are recycling your money two to one. We are looking for a high number, and we have only included companies scoring 1.5 to one, or greater.
We are also showing the production of oil, gas and natural gas liquids in thousands of BOE per day.
What did we find?
Calgary-based TransGlobe Energy owns property in Egypt and Yemen. The company scores well in most categories, as does Long Run Exploration, an intermediate oil and gas company operating in Western Canada.
Torc Oil & Gas's BOE production per share is high as a result of its purchase of Vero Energy in November, 2012, and Torc's recent acquisition of a southeast Saskatchewan property.
Investors should conduct further research or contact an investment professional before investing in any of these companies.