This Mid-Cap Might Be the Best Way to Play an Oil Recovery

With 85% of its production volumes tied to light oil from Saskatchewan, Torc Oil and Gas Ltd (TSX:TOG), could be the best name in the energy sector.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

I don’t know about you, but I like a good bargain. By that I mean I like to buy companies with good management teams at the helm, excellent growth prospects, and strong balance sheets to back it all up. With Canadian heavy oil trading at the largest discount to its U.S. counterpart in recent history, the beleaguered oil and gas sector presents a slew of bargain names with attractive risk/reward ratios. While some energy stocks are on fire sale for good reason, one name that does not deserve to be trading where it’s current at is Torc Oil and Gas (TSX:TOG).

TORC is a light-oil-based producer with operations mostly in the southern Saskatchewan region. This geographic detail is important, as this means TORC has access to the lighter crude oils from that area, which trade at better prices than Canadian heavy oil. For example, medium density oils like Saskatchewan’s Midale are trading at US$34 per barrel compared to sub-$12 for Western Canadian Select. Moreover, TORC’s product mix towards the lighter oils was also well reflected in its latest quarterly report, which showed a realized price per barrel of $66.83, when combined with a 29% increase in production over last year, points to strong cash flow generation to weather this crude downturn.

As for its capital program, the company only drilled an additional three wells in the Cardium area in favour of the richer economics in southern Saskatchewan, which saw an additional 40 conventional wells drilled. Furthermore, although this quarter was a busy one for TORC, its total capital expenditures are still on track to achieve the guidance of $185 million for 2018.

Finally, the higher realized prices and capital discipline has translated into cold, hard cash for TORC, which saw funds flow on a per-share basis increase 16% in the last quarter versus the year before ($0.44 compared to $0.39 per share). This cash flow profile bodes incredibly well for TORC’s dividend prospects, which are some of the best in the industry, with a payout ratio at a very manageable 67%. In fact, given what we’ve seen so far, I would not rule out a dividend increase in the near term, especially as oil begins to recover.

So, why the sell off? I believe the stock is trading where it is mostly due sector-wide bearish sentiment. While a rising tide tends to lift all ships, unfortunately the inverse is also true, as proven cash flow-generating names with excellent well economics have fallen victim to the market malaise. On the bright side, TORC’s valuation has not been this cheap in a long time. According to analysts, TORC is currently trading at roughly four times its debt adjusted cash flow — well below its long-term averages, and a bargain given the value of its future prospects.

With an enviable cash flow position and increased forward production guidance, TORC is definitely a name I would pick to weather the downturn and reward its investors through both capital gains and dividends.

Just Released! 5 Stocks Under $50 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $50 a share.

Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.

Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Victoria Matsepudra has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Energy Stocks

A plant grows from coins.
Energy Stocks

Got $25,000? Turn it Into $200,000 in a TFSA as Canadian Dollar Gains

This energy stock may not have a high dividend, but it certainly has a high rate of growth to look…

Read more »

A meter measures energy use.
Dividend Stocks

Where I’d Invest $15,000 in Top Utilities Stocks for Steady Income

These utility stocks are some of the top choices, but they aren't the usual group of investments.

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

How I’d Allocate $1,000 in Energy Stocks in Today’s Market

Discover why energy stocks are crucial for Canadian investors as the election approaches amidst tariff challenges.

Read more »

oil and natural gas
Energy Stocks

3 Canadian Energy Stocks to Buy and Hold for Decades of Passive Income

Energy stocks can be some of the best choices for consistent income, and these three remain top performers.

Read more »

oil and gas pipeline
Energy Stocks

Why Billionaires Are Pulling Cash Out of U.S. Stocks and Buying Canadian Energy

This analyst-recommended energy stock could be one to watch in 2025.

Read more »

oil pump jack under night sky
Energy Stocks

Top Energy Stocks to Invest in 2025

Most investors are avoiding energy stocks over fears that Trump tariffs could bring a structural change in the energy supply…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Why I’d Include These 3 Essential Dividend Stocks in My TFSA

Here are three dividend stocks I’d include in my TFSA today.

Read more »

Asset Management
Energy Stocks

Why I’d Consider These 3 Small Caps for a $5,000 Investment With Long-Term Horizons

Investing in small-cap stocks such as Vecima and Total Energy should help you deliver outsized gains over the next 12…

Read more »