What are we looking for?
Canadian energy companies with strong cash flow during a low oil-price environment.
The screen
Global demand for oil has decreased by 25 million barrels a day (b/d), owing largely to the economic slowdown caused by COVID-19, yet production has remained relatively unchanged. Crude oil prices have declined sharply, with Brent down 52 per cent and Western Canadian Select (WCS) down 72 per cent year-to-date.
While the S&P/TSX Composite Index is down 17 per cent year-to-date, the S&P/TSX Energy Index is down more than 35 per cent, with some Canadian energy producers seeing their equity value fall by as much as 80 per cent.
Even though the Organization of Petroleum Exporting Countries and its allies including Russia (OPEC+) recently agreed to cut output by 9.7 million b/d, with possibly additional cuts by the United States, Canada and Brazil, the supply-demand imbalance will remain for some time.
Today we screen for Canadian energy companies well positioned to navigate a world where WCS is trading well below US$10 and can generate enough cash flow to produce profits.
- First, we screen for Canadian domiciled energy companies with a market capitalization greater than $250-million.
- Next, we screen for companies that have positive free operating cash flow (FOCF) over the past 12-month period.
- Finally, we screen for companies with high earnings quality. We use the Refinitiv StarMine Earnings Quality model to screen for companies with an earnings quality score of greater than or equal to 75. The Earnings Quality model is a percentile ranking of stocks based on the sustainability of earnings, with 100 representing the highest rank.
More about Refinitiv
Refinitiv is one of the world’s largest providers of financial market data and infrastructure, serving more than 40,000 institutions in approximately 190 countries. Refinitiv provides information, insights and technology that drive innovation and performance in global financial markets, enabling the financial community to trade smarter and faster, overcome regulatory challenges and scale intelligently.
What we found
The screen produced five companies: two integrated oil and gas companies (Suncor Energy Inc. and Imperial Oil Ltd.) and three oil and gas exploration and production companies (MEG Energy Corp., Crescent Point Energy Corp., and Parex Resources Inc.).
In the past when oil prices had fallen sharply, integrated companies with refining assets were able to generate profits through their downstream business units by selling refined products such as jet fuel, gasoline and diesel. With weak demand for many finished products, the integrateds are not experiencing the same benefits during this period of low oil prices. That may explain why some well-known integrated companies, such as Husky Energy Inc. and Canadian Natural Resources Ltd., did not make the screen.
Note that Suncor has a diversified upstream portfolio (unlike Imperial Oil, which operates entirely in the oil sands), allowing it to sell into global markets at a higher price, which should help if WCS prices remain low.
Some non-integrated companies may benefit in a low oil price environment if they have hedged their production, meaning they have locked in a sale price for future output. Crescent Point says it has roughly 50 per cent of its 2020 production hedged at $75 (Canadian) a barrel, providing the company with revenue certainty and protection against crude oil price volatility. MEG also has a strong hedging program in place for 2020.
Investors are advised to do their own research before trading in any of the securities shown below.
Stephen Donovan, MBA, is a customer success manager supporting Refinitiv’s trading, investment and advisory solutions.
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