I am a huge fan of researching, analyzing, and uncovering bargains for investors in Canada’s energy patch. My favorites are the independent oil and gas companies because that’s where some of the best deep-value investment opportunities can be found.
These companies are essentially those that only have upstream or oil exploration and production operations, making them significantly different investment propositions from larger integrated energy companies like Suncor Energy Inc., Canadian Natural Resources Ltd., or Husky Energy Inc.
They come in a wide range of sizes and operating structures while offering considerably more potential upside than larger integrated peers, though typically with more risk. They include large caps with significant oil reserves and production like light oil heavyweight Crescent Point Energy Inc. (TSX: CPG)(NYSE: CPG) and troubled Talisman Energy Inc. (TSX: TLM)(NYSE: TLM).
Mid caps include the likes of troubled Penn West Petroleum Ltd. (TSX: PWT)(NYSE:PWE) and Colombia’s largest independent oil producer, Pacific Rubiales Energy Corp. (TSX: PRE). And finally, beaten-down Lightstream Resources Ltd. (TSX: LTS), Parex Resources Inc. (TSX: PXT), and Twin Butte Energy Ltd. (TSX: TBE) round out the small caps.
More importantly for investors, they can invest in exotic locations without leaving Canada, with a number of Canadian independent oil and gas companies operating in higher- risk jurisdictions including Albania, Colombia, and Argentina. The key question for investors is how to identify value among these companies.
How to identify value
Typically, when looking for value among independent oil and gas companies, investors need to quantify the degree of investment risk while trying to determine whether a company is undervalued. To do this, I seek to identify those companies with solid growth prospects, attractive valuations, and solid operating margins.
In order to determine whether a company is attractively valued, I take a closer look at the following multiples: enterprise value to oil reserves, daily crude production, and EBITDA.
Meanwhile, the best industry measure of profitability is the margin, or netback per barrel of crude produced, with higher being better.
Which companies offer value right now?
Despite claims that the market is overvalued and industrywide fundamentals are softening including a weaker outlook for crude prices, there is still considerable value to be found among Canada’s independent oil and gas companies.
Let’s take a closer look at the key valuation metrics for a cross-section of oil explorers and producers listed on the TSX:
| Company | $ EV | EV/EBITDA | EV/Oil Reserves | EV/Barrels Produced Daily | Netback Per Barrel |
| Crescent Point Energy Inc. | $22B | 9 | 34 | $181,135 | $54.75 |
| Talisman Energy Inc. | $15B | 6.3 | 10 | $60,271 | $27.18 |
| Canadian Oil Sands Ltd. (TSX: COS) | $11B | 9 | 9 | $174,938 | $46.62 |
| Pacific Rubiales Energy Corp. | $10B | 3.6 | 20 | $70,148 | $62.76 |
| Penn West Petroleum Ltd. | $7B | 11 | 14 | $68,274 | $36.67 |
| Whitecap Resources Inc. (TSX: WCP) | $5B | 12.7 | 32 | $190,103 | $46.09 |
| Pengrowth Energy Corp. (TSX: PGF)(NYSE: PGH) | $5B | 9.2 | 13 | $100,513 | $23.86 |
| Parex Resources Inc. | $2B | 5.4 | 37 | $107,671 | $61.65 |
| Gran Tierra Energy Inc. (TSX: GTE)(NYSE: GTE) | $2B | 3.8 | 17 | $103,498 | $70.55 |
| Lightstream Resources Ltd. | $1B | 5 | 21 | $98,835 | $57.49 |
| Surge Energy Inc. (TSX: SGY) | $2B | 21 | 25 | $166,861 | $54.07 |
| Twin Butte Energy Ltd. | $627M | 6 | 19 | $64,838 | $41.87 |
Source data: Company filings.
A perennial investor favorite is Crescent Point Energy, which consistently pays a juicy 6% dividend yield while growing its core asset base and oil production through high-quality accretive acquisitions. But with an EV of nine times EBITDA, it appears expensive compared to its peers, despite having one of the best netbacks in the patch of $54.75 per barrel of crude produced. However, this netback, coupled with its solid oil reserves, leaves it better positioned to weather the looming oil price crunch than many of its smaller peers.
Whitecap Resources Inc. is another company that has successfully implemented the dividend growth plus model, and has grown rapidly while unlocking value for investors and now offers a 4% dividend yield. But with its share price having shot up a massive 43% over the last year, it now appears expensive when compared to its peers.
Troubled intermediate oil producers Pengrowth and Penn West also appear expensive and their poor netbacks indicate their profitability is under further pressure from softer crude prices.
Interestingly, the companies that appear to be the best value and the most attractively priced are operating predominantly in Colombia, not Canada. Not only are Pacific Rubiales, Parex Resources, and Gran Tierra Energy trading with particularly low enterprise values to EBITDA, but they are all generating a netback of over $60 per barrel of crude produced, which is superior to their Canadian peers.
This can be attributed to the market’s overblown perception of risk in Colombia, with the country’s security environment now having stabilized and the government pursuing policies that are particularly friendly to investment in its oil industry.
This, I believe, makes all three the most attractive plays for investors seeking exposure to the energy sector even with crude prices continuing to soften.
