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4 Stocks to Tap Into Canadian E&P Industry's Positivity
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With the energy space rebounding strongly in 2021, the underlying fundamentals of the Zacks Oil and Gas - Exploration and Production - Canadian industry have strengthened considerably. As Canadian crude prices approach the C$60s and natural gas consolidates at C$4, upstream firms like Canadian Natural Resources (CNQ - Free Report) , Ovintiv (OVV - Free Report) , Crescent Point Energy and Enerplus Corporation (ERF - Free Report) are likely to see their earnings and cash flow improve significantly.
About the Industry
The Zacks Oil and Gas - Canadian E&P industry consists of companies based in Canada and focused on exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate etc. The economics of oil and gas supply and demand is the fundamental driver of this industry. In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns on drilling inventory and causes them to vary their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
3 Key Investing Trends to Watch in the Oil and Gas - Canadian E&P Industry
Rallying Oil & Gas Prices: The price of WCS crude — the Canadian benchmark — has come a long way since the depths of negative prices in April. Closing in on C$60 a barrel — the highest since 2014 — the oil market is expected to tighten throughout 2021, supported by the OPEC+ cuts, easing of the lockdown and an earlier-than-expected pickup in the commodity’s demand on the back of vaccine rollouts. Adding to these positive indicators, a host of Canadian and U.S. producers have slashed production. Meanwhile, Canada’s AECO natural gas prices are hovering around C$4 as a sizzling summer results in strong demand on the back of a ramp up in the use of coolers. The oil and gas price gains will greatly benefit the results of E&P companies for obvious reasons.
Relentless Focus on Lowering Costs: Canadian energy companies have changed their approach to spending capital. Over the past few years, producers worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. They managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers. Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs, while the coronavirus-induced collapse in crude has forced them to adopt a more disciplined approach to spending capital. These actions might keep short-term production flat (or marginally up) but are expected to preserve cash flow, support balance sheet strength and help the companies eventually emerge stronger.
Pipeline Limitations Put Pressure on Producers: While oil production is surging in Canada, the country's exploration and production sector has remained out of favor, primarily due to the scarcity of pipelines. In short, pipeline construction in Canada has failed to keep pace with rising domestic crude volumes — the heavier sour variety churned out of the oil sands — resulting in infrastructural bottleneck. This has forced producers to give away their products in the United States — Canada’s major market — at a discounted rate. As it is, Canadian heavy crude is inferior to the higher-quality oil extracted from shale formations in the United States and is more expensive to transport and refine. Following U.S. President Joe Biden’s revocation of TC Energy’s (TRP - Free Report) contentious Keystone XL pipeline and the company’s subsequent termination of the project, Canadian oil sands producers will have to wait a little longer for the takeaway capacity issue to be resolved.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Canadian E&P is a four-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #44, which places it in the top 18% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are highly optimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2021 have surged 322.6% year to date, the same for 2022 have almost doubled over the same timeframe.
Considering the encouraging near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - Canadian E&P has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has soared 171.7% over this period compared with the broader sector’s increase of 40.4%. Meanwhile, the S&P 500 has gained 39.7%.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month EV/EBITDA ratio, the industry is currently trading at 11.04X, significantly lower than the S&P 500’s 17.61X. It is, however, well above the sector’s trailing-12-month EV/EBITDA of 5.71X.
Over the past five years, the industry has traded as high as 17.93X, as low as 2.72X, with a median of 6.85X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
Stocks to Watch Out For
Crescent Point Energy: This Calgary-based company, whose operations are primarily concentrated in southwest and southeast Saskatchewan, carries a Zacks Rank #2 (Buy). Crescent Point, which recently acquired Royal Dutch Shell’s (RDS.A) Alberta assets for C$900 million, counts operational excellence and prudent cost management as its strength.
The 2021 Zacks Consensus Estimate for the company indicates 132% earnings per share growth over 2020. Crescent Point stock is up 93.6% so far this year.
Price and Consensus: CPG
Enerplus Corporation: Enerplus focuses on Bakken and Three Forks formations in the Williston Basin in North Dakota, together with interests in the Marcellus Basin and waterflood projects in Canada. Banking on its low financial leverage and robust liquidity, this upstream energy firm is in a relatively better position to take advantage of the commodity price rebound.
The 2021 Zacks Consensus Estimate for Enerplus indicates 1,471.43% earnings per share growth over 2020. The company currently carries a Zacks Rank #2. In 2021, Enerplus shares have surged 129.8%.
Price and Consensus: ERF
Ovintiv: An upstream operator, Ovintiv (formerly known as Encana) holds attractive oil and gas production portfolio in three major North American unconventional basins: Montney, Anadarko and the Permian. Following the Newfield acquisition in 2019, the company has achieved a higher liquids focus, greater scale and cost synergies. Ovintiv has also done a commendable job of cutting its expenses in a disciplined manner, which should boost free cash flow generation.
The 2021 Zacks Consensus Estimate for Ovintiv indicates 888.57% earnings per share growth over 2020. The company currently carries a Zacks Rank #3 (Hold), while its shares have gained 119.2% year to date.
Price and Consensus: OVV
Canadian Natural Resources: This Canadian energy major boasts a diversified portfolio of crude oil (heavy as well as light), natural gas, bitumen and synthetic crude oil. Canadian Natural Resources raised its dividend by 11% in March, reflecting strength in its cash flows. The company is counted as a 'Canadian Dividend Aristocrat' with an attractive yield. What’s more, Canadian Natural Resources has a solid track record of dividend hikes, having increased payout for 21 consecutive years.
The 2021 Zacks Consensus Estimate for Canadian Natural Resources indicates 885.42% earnings per share growth over 2020. The company, whose stock has gained 50.9% in 2021, currently carries a Zacks Rank #3.
Price and Consensus: CNQ
Zacks Names “Single Best Pick to Double”
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.
Image: Bigstock
4 Stocks to Tap Into Canadian E&P Industry's Positivity
With the energy space rebounding strongly in 2021, the underlying fundamentals of the Zacks Oil and Gas - Exploration and Production - Canadian industry have strengthened considerably. As Canadian crude prices approach the C$60s and natural gas consolidates at C$4, upstream firms like Canadian Natural Resources (CNQ - Free Report) , Ovintiv (OVV - Free Report) , Crescent Point Energy and Enerplus Corporation (ERF - Free Report) are likely to see their earnings and cash flow improve significantly.
About the Industry
The Zacks Oil and Gas - Canadian E&P industry consists of companies based in Canada and focused on exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate etc. The economics of oil and gas supply and demand is the fundamental driver of this industry. In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns on drilling inventory and causes them to vary their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
3 Key Investing Trends to Watch in the Oil and Gas - Canadian E&P Industry
Rallying Oil & Gas Prices: The price of WCS crude — the Canadian benchmark — has come a long way since the depths of negative prices in April. Closing in on C$60 a barrel — the highest since 2014 — the oil market is expected to tighten throughout 2021, supported by the OPEC+ cuts, easing of the lockdown and an earlier-than-expected pickup in the commodity’s demand on the back of vaccine rollouts. Adding to these positive indicators, a host of Canadian and U.S. producers have slashed production. Meanwhile, Canada’s AECO natural gas prices are hovering around C$4 as a sizzling summer results in strong demand on the back of a ramp up in the use of coolers. The oil and gas price gains will greatly benefit the results of E&P companies for obvious reasons.
Relentless Focus on Lowering Costs: Canadian energy companies have changed their approach to spending capital. Over the past few years, producers worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. They managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers. Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs, while the coronavirus-induced collapse in crude has forced them to adopt a more disciplined approach to spending capital. These actions might keep short-term production flat (or marginally up) but are expected to preserve cash flow, support balance sheet strength and help the companies eventually emerge stronger.
Pipeline Limitations Put Pressure on Producers: While oil production is surging in Canada, the country's exploration and production sector has remained out of favor, primarily due to the scarcity of pipelines. In short, pipeline construction in Canada has failed to keep pace with rising domestic crude volumes — the heavier sour variety churned out of the oil sands — resulting in infrastructural bottleneck. This has forced producers to give away their products in the United States — Canada’s major market — at a discounted rate. As it is, Canadian heavy crude is inferior to the higher-quality oil extracted from shale formations in the United States and is more expensive to transport and refine. Following U.S. President Joe Biden’s revocation of TC Energy’s (TRP - Free Report) contentious Keystone XL pipeline and the company’s subsequent termination of the project, Canadian oil sands producers will have to wait a little longer for the takeaway capacity issue to be resolved.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Canadian E&P is a four-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #44, which places it in the top 18% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are highly optimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2021 have surged 322.6% year to date, the same for 2022 have almost doubled over the same timeframe.
Considering the encouraging near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - Canadian E&P has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has soared 171.7% over this period compared with the broader sector’s increase of 40.4%. Meanwhile, the S&P 500 has gained 39.7%.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month EV/EBITDA ratio, the industry is currently trading at 11.04X, significantly lower than the S&P 500’s 17.61X. It is, however, well above the sector’s trailing-12-month EV/EBITDA of 5.71X.
Over the past five years, the industry has traded as high as 17.93X, as low as 2.72X, with a median of 6.85X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
Stocks to Watch Out For
Crescent Point Energy: This Calgary-based company, whose operations are primarily concentrated in southwest and southeast Saskatchewan, carries a Zacks Rank #2 (Buy). Crescent Point, which recently acquired Royal Dutch Shell’s (RDS.A) Alberta assets for C$900 million, counts operational excellence and prudent cost management as its strength.
You can see the complete list of today’s Zacks #1 Rank stocks here.
The 2021 Zacks Consensus Estimate for the company indicates 132% earnings per share growth over 2020. Crescent Point stock is up 93.6% so far this year.
Price and Consensus: CPG
Enerplus Corporation: Enerplus focuses on Bakken and Three Forks formations in the Williston Basin in North Dakota, together with interests in the Marcellus Basin and waterflood projects in Canada. Banking on its low financial leverage and robust liquidity, this upstream energy firm is in a relatively better position to take advantage of the commodity price rebound.
The 2021 Zacks Consensus Estimate for Enerplus indicates 1,471.43% earnings per share growth over 2020. The company currently carries a Zacks Rank #2. In 2021, Enerplus shares have surged 129.8%.
Price and Consensus: ERF
Ovintiv: An upstream operator, Ovintiv (formerly known as Encana) holds attractive oil and gas production portfolio in three major North American unconventional basins: Montney, Anadarko and the Permian. Following the Newfield acquisition in 2019, the company has achieved a higher liquids focus, greater scale and cost synergies. Ovintiv has also done a commendable job of cutting its expenses in a disciplined manner, which should boost free cash flow generation.
The 2021 Zacks Consensus Estimate for Ovintiv indicates 888.57% earnings per share growth over 2020. The company currently carries a Zacks Rank #3 (Hold), while its shares have gained 119.2% year to date.
Price and Consensus: OVV
Canadian Natural Resources: This Canadian energy major boasts a diversified portfolio of crude oil (heavy as well as light), natural gas, bitumen and synthetic crude oil. Canadian Natural Resources raised its dividend by 11% in March, reflecting strength in its cash flows. The company is counted as a 'Canadian Dividend Aristocrat' with an attractive yield. What’s more, Canadian Natural Resources has a solid track record of dividend hikes, having increased payout for 21 consecutive years.
The 2021 Zacks Consensus Estimate for Canadian Natural Resources indicates 885.42% earnings per share growth over 2020. The company, whose stock has gained 50.9% in 2021, currently carries a Zacks Rank #3.
Price and Consensus: CNQ
Zacks Names “Single Best Pick to Double”
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.
Free: See Our Top Stock and 4 Runners Up >>