Petro-Canada

Petro-Canada is taking advantage of its size as one of Canada's largest integrated oil companies to invest in the risky, but potentially lucrative, Alberta oil-sands development. The company beat Wall Street estimates three out of four quarters in 2007 on average of 7.44%. Petro-Canada has a 2008 P/E of only 7.62.

Full Analysis

Petro-Canada (PCZ) is one of Canada's largest oil and gas companies, operating in both the upstream and the downstream sectors around the world.

Petro-Canada, a Zacks #1 Rank (Strong Buy), operates with five divisions: North American Natural Gas, International Exploration & Production, Alberta Oil Sands, East Coast Oil, and Refining and Marketing.

In its natural gas division, PCZ operates in Canada and the US Rockies. Internationally the company explores in the North Sea, Libya, Syria and Trinidad & Tobago. Petro-Canada is also the second largest refiner in Canada.

PCZ owns 12% of Syncrude, the world's largest oil sands producer, which is jointly owned by Canadian Oil Sands Trust, Imperial Oil Ltd., ConocoPhillips, Nexen Inc. and others. The oil sands are important because they are the world's largest oil reserves outside of Saudi Arabia.

However, the oil is extremely labor and resource intensive to extract as experts believe most production going forward will require high-pressure steam pumped into the ground to separate the oil from the sand. The high-pressure system burns huge amounts of natural gas to produce the steam. Petro-Canada has delayed its big Fort Mckay oil-sands development while it assesses the impact of a recent royalty change.

2007 Was a Good Year

PCZ successfully increased production by 21% in 2007 compared to 2006. It also replaced 127% of proved plus probable reserves over five years. Cash flow was $3.8 billion in 2007.

The fourth quarter 2007 was more challenging for the company as it missed fourth-quarter estimates by 31 cents, reporting $1.08 compared to analysts' estimates of $1.38 per share. The miss was due to settling the Buzzard derivative contract hedges that were announced on Dec 12, 2007.

The payment to settle the contracts was $1.145 billion or $2.36 per share, which significantly decreased cash flow to $17 million compared with $991 million in the same quarter 2006. The company reported net income of $513 million compared with $486 million in the fourth-quarter 2006.

Petro-Canada Has High Hopes For 2008

The company is optimistic about 2008. Planned capital expenditures are forecast at $5.3 billion for the year.

"In 2008, we will bring on the Edmonton refinery conversion project - a significant contributor to future cash flows. We will also advance our six other growth projects, making final investment decisions on Fort Hills, the Syria Ebla gas and Montreal coker projects," said Ron Brenneman, president and chief executive officer.

Consensus Estimates Rise for the First Quarter and the Year

Analysts have shrugged off the fourth quarter earnings disappointment and have been raising estimates for the first quarter and the year.

In the last week, one out of four covering analysts raised consensus estimates for the first quarter by 25 cents to $1.69 from $1.44 per share. Estimates are up 31% over the last 60 days.

For the year, consensus estimates also continue to rise. One out of five covering analysts raised in the last week by 54 cents to $6.65 from $6.11 per share. Estimates are up sharply in the last sixty days, by $1.40 per share, as crude and natural gas prices remain elevated.

Petro-Canada is trading at only 7.62x 2008 earnings, under the industry average of 10.6. Its price-to-book is 2.33. The company also has an excellent five year average return on equity of 23.07%. PCZ is also giving back to shareholders with a 1.00% dividend yield. The company reports first-quarter earnings on Apr 29.