Category: Canada

The following is a list of all TSX-traded companies in the energy production sector that have a market capitalization of greater than CAD$1 billion. There are only 20 left. There are only 29 remaining between CAD$100 million and $1 billion. Some of them are not even domestic producers. Included are my VERY pithy notes.

Keep in mind that “profitable” here is a general and not strict description. Accounting (IFRS/GAAP) profitability may vary wildly with the colloquial notion of ‘profitability’, which is “can this company get more cash than it has to dump into its own production?”.

Out of the 20 companies:
* 6 are majority foreign operations (in descending market cap rank order: ECA, VET, PXT, EFR, CNU, FEC)
* 2 are royalty operations (PSK, FRU); similar to gold royalty companies, inherently there is nothing wrong with this, other than that these companies don’t have to directly incur much of the burden facing the rest of the industry at present
* 5 have some foreign operations, including SU (small), CNQ (small), HSE (small), CPG (~25%) and BTE (~40%).

Effectively, this leaves 12 majority-Canadian producers to invest in.

As a side note for Canadian nationalism, the “purest” operating Canadian oil major (no substantive operations outside of Canada) is Imperial Oil, but it is 69.6% owned by Exxon. Husky is majority controlled by Hong Kong finance titan Li Ka-shing. This leaves 10 firms left to invest in if you wish to exclude IMO and HSE because of their majority foreign-held ownership.

TSX Oil/Gas producers over $1 billion market cap

Name	Ticker	MktCap ($Mil)	Notes
Suncor Energy Inc.	SU	64,001	Profitable
Canadian Natural Resources Limited	CNQ	42,081	Profitable
Imperial Oil Limited	IMO	27,763	Profitable
Cenovus Energy Inc.	CVE	14,192	Profitable
Husky Energy Inc.	HSE	13,099	Profitable; FCF mildly positive
Encana Corporation	ECA	9,714	Profitable; Majority USA
Tourmaline Oil Corp.	TOU	4,538	Profitable; FCF mildly positive
Vermilion Energy Inc.	VET	4,407	Profitable; mainly Europe operator
PrairieSky Royalty Ltd.	PSK	4,299	Royalty Company
Parex Resources Inc.	PXT	3,072	Profitable; Colombia operator
Crescent Point Energy Corp.	CPG	2,370	Profitable; FCF mildly positive; 1/4 US ops
Enerplus Corporation	ERF	2,306	Mostly USA; FCF neutral
CNOOC Limited	CNU	2,299	China
Seven Generations Energy Ltd.	VII	2,269	FCF mildly negative
ARC Resources Ltd.	ARX	2,268	FCF negative (neutral w/o dividend)
Whitecap Resources Inc.	WCP	1,754	FCF positive
MEG Energy Corp.	MEG	1,490	FCF positive; fairly high debt
Frontera Energy Corporation	FEC	1,331	LatAm producer
Baytex Energy Corp.	BTE	1,130	40% Texas; FCF positive
Freehold Royalties Ltd.	FRU	1,003	Royalty Company

Market Cap as of June 30, 2019.
 
Other notes

Just by eyeballing the valuations, a very passive investor could do far worse than just sticking their money in an equal-weighted fund of the top-five or top-ten and just sitting on it. Again, my “paper napkin valuation” is just that – a paper napkin take which ignores the quality (or lack thereof) of assets, or hedging portfolios, etc., but a 100,000 foot-above-the-sky valuation metric is instructive:

Looking at Suncor, they have operating earnings, plus depreciation, minus CapEx, minus CASH taxes and interest of $3.9 billion for the half-year. That’s about $2.50/share. It’s not as if they’re over-leveraged either – debt is about $15 billion. Considering they’re trading at CAD$38/share, they look cheap on immediate glance (multiple 7.6x). Management clearly thinks so as well considering they’ve been buying back shares like crazy.

CNQ’s 1H number is $2.9 billion, or $2.45/share. They’re slightly more leveraged ($24 billion in debt) but probably because they scooped up Devon Energy’s assets adjacent next to theirs in Alberta. Stock trades at CAD$32/share and the multiple is 6.5x.

The other top five, relatively speaking, look pretty cheap. CVE generated about $1.1 billion in free cash for the first half of the year (93 cents a share) which in relation to its $11.28 stock price, is a 6.1x multiple – they slashed their dividend earlier and have been using the money to pay down debt, which sits at around $7.1 billion and management has not made it a secret that they want it to get to around $5 billion. This should happen sometime in 2020.

What’s the danger in a broad-based index investment in these names? Commodity prices going down, and a continued hostile government environment for continued production. There’s going to be a lot of money on the sidelines awaiting the result of the upcoming federal election.

Back on June 24, 2019 I put a notification out that Canadian preferred shares were looking interesting, but really flubbed with the timing. At the time 5-year government bond yields were 20 basis points less than today.

Sadly my sense of market timing let me down and I was only able to procure a 1% position in a rock-solid issuer’s preferred shares. Too bad – was looking at deploying a significant amount of cash there but this one got away from me. Early June perhaps was the time to get in.

It’s pretty obvious a bunch of institutional money stampeded into the market and this gets bubbled into algorithmic purchases of these securities, which typically have quite large spreads.

In general, however, I do note that physical infrastructure preferred shares (e.g. energy, Brookfield, etc.) exhibited a much higher price increase than financials – the typical rise for a physical infrastructure preferred share trading at 2/3rds of par value has been around a dollar, while the financials have had about half of it. In most instances, securities trading with “minimum rate resets” have been ridiculously overpriced, but there was one that looked reasonably attractive for “boring capital”.

If 5 year yields drop again we could see prices on preferred shares drop again – I’d welcome it. In the meantime I’ll look elsewhere.

I have taken a small equity position (roughly 2.5% each) in two Canadian natural gas producers. I’ve exhaustively looked at the (not obviously insolvent) producers that are at least 75% natural gas boe equivalent and chosen the two companies I’ve deemed ‘best’ in lieu of just making a home-brew index of all of them.

This is not a particular call on the natural gas industry in general – right now the economics are absolutely horrible for Canada. There have been some days where spot pricing has been such that you have to pay to give away your natural gas! The federal government is hell-bent on destroying the fossil fuel industry. The USA has shale gas coming out of their… well, you know. There’s no hope and only despair!

Sounds like a good time to invest.

However, run the thought experiment on every company you look at: “Let’s pretend you could acquire 100% of the company’s equity for ZERO, but had to take a personal guarantee on their outstanding debt. Would you take them over?”

Under the right conditions, a lot of these companies will double, triple or even quadruple their equity prices. The timing is unclear, but we will see. I remember getting into oil and gas for a short-lived foray in 2014 that exhibited a colossal amount of stupidity, but will this time be different?

This headline passed by my radar: Japan Tobacco Wins Court Protection in Canada Over Smoking.

In both US and Canadian jurisdictions, governments have been engaging tobacco companies in civil litigation over the undisclosed risks of smoking. The majority of drama settled in the late 90’s in the USA, but things in Canada have taken longer.

According to the article:

The lawsuits were in favor of smokers seeking damages for addiction and smoking-related diseases, who argued they were never warned of the risks.

There are no longer any Canadian publicly traded companies that deal with the tobacco industry, although you can invest in Philip Morris (most associated with the Marlborough brand) in the USA.

However, this gets me thinking – 20 years down the line, when rampant consumption of marijuana is determined to be a cause of the breakdown of the brain’s normal functioning in older age, will governments decide to go after marijuana companies for not disclosing this hitherto undisclosed risk of consuming too much THC? What about second-hand smoke, which is more abundant than ever on the streets now that marijuana is legalized?

I try not to allow politics or morals interfere with objective investment analysis, but the double standard that is applied between tobacco and marijuana is amusing, to say the least. When marijuana is no longer in favour, watch out!