Oil and Gas Analysis Help Topics

Peer Comparison

Stock Screener

The stock screener allows you to access more than 400 stocks listed on the TSX and the TSX Venture exchange in a click of a button. The stocks are divided into 5 profiles:

• Junior. E&Ps with production from 0 to 10,000 boepd
• Intermediate. E&Ps with production from 10,001 to 100,000 boepd
• Senior. E&Ps with 100,000+ boepd of production
• Oilfield Services. including fraccers, drillers, rentals etc.
• Pipelines

When you first sign in, the default view will display the full list of stocks (all profiles included):

stock screener default view

The stock list was initially put together excluding equities with a price < $0.05. Since then, some stocks have dropped below a nickel. Companies will be regularly added or removed from the list depending on M&A activity and new listings.

Each column can be reordered in ascending or descending order. For example, if a user clicks on YTD Chg%. he/she will be able to order the list according to YTD% performance. The price shown is delayed by 15-20 minutes.

From the profile drop down menu, users can select a specific E&P profile populating the list with stocks of interest. For example, selecting Junior from the drop down menu will only list E&P companies with a junior profile.

By clicking on the Dividend Payers checkbox, only dividend paying stocks will be displayed according to the selected profile and  the price filter.

By clicking on Top 10 YTD checkbox, the best and worst 10 performing stocks so far this year will be displayed according to the selected profile and the price filter.

By clicking on Today’s Top 5 Movers checkbox, the top 5 gainers and losers for the day will be displayed according to the selected profile and the price filter.

The screener allows you to mix and match according to your interest.  For example users can:

• Display the top 5 daily movers for the whole oil and gas market or for one of the profiles.
• Display the top 10 year-to-date performers for the whole oil and gas market or for one of the profiles.
• Display only the dividend payers from the list or for a profile.
• Apply ascending or descending order to any column of your choice.
• Last but not least, users can filter the list by entering a price and clicking on Filter to execute the process.

The Filter button executes a price filter based on the user’s selection of <= or >= operation along with the price level. Unless you are looking for penny stocks to trade, it is recommended to keep stocks at or above $0.50 per share. This eliminates the noise from moves in illiquid or penny stocks.

The Reset button clears all check-boxes and price filters resetting the view to the default one you see in the picture above.

The Refresh button updates your table contents. The time-stamp on the top left corner of title bar indicates the last time you refreshed your list.

Enterprise Value

Enterprise value (EV) is calculated as market cap plus debt minus cash. Think of EV as the theoretical takeover price of a company.  A buyer would assume the debt or pocket the cash in the event of a buyout. In this section only the basic number of outstanding shares is used. Dilutive securities such as warrants or options are ignored. The EV figure provides a quick snapshot of the company value based on the latest stock price.

PS. The EV figure is not an accurate estimate which can be used to calculate the net asset value.

Production

Production volumes under this section will vary during the year as they are reviewed on a quarterly basis. The current approach uses the mid-range annual average guidance of each company once the New Year’s budget is released. As the first half of that year comes to a close, production figures are updated based on the exit rate guidance.

For example:

Company A is guiding for an average annual production of 3,000 boepd and an exit rate guidance of 4,000 boepd for 2013.

For H1 2012, the number used is 3,000 boepd and for H2 we switch to using 4,000 boepd.

The idea is to evaluate a company’s upside through a forward looking snapshot of the company’s production. We’re looking ahead just like the market does.

The total production of a company is measured in barrels of oil equivalent per day (BOE/D.) Production is divided into 4 categories: Oil, Heavy Oil, Natural gas liquids (NGLs) and Natural Gas.

Production volumes are editable to provide investors with the possibility of running different scenarios including:

• Exceeding guidance
• Not meeting guidance
• Future production estimates

The % Liquids is essentially all the non-gaseous production in the company (oil+heavy oil + NGLs).

The % Gas represents the percentage of total production weighted to dry natural gas.

Total BOE/D represents the company’s combined production in barrel of oil equivalent per day using a 6:1 conversion for dry natural gas production.

Realized Price

The realized price for each production component should be viewed as an average realized price per barrel. It’s an average because it takes into account hedging gains/losses, depends on the average API grade of oil being sold and the composition of natural gas liquids.

Oil (light/medium/condensate)

API gravity measures how heavy or light petroleum liquid is compared to water. A company may produce both light oil and medium oil from its properties. This production is rarely broken up on the balance sheet unless price differentials & production volumes are noticeable. Companies simply report a common realized price per barrel of combined oil production. Medium oil, Condensate or even NGLs might be lumped together on the balance sheet under a single realized price. Often it’s because the percentage weighting of these components are negligible.

This means that if light oil is selling at $90 per barrel, companies with mixed grades of oil production will report a realized price lower than $90 if medium oil or NGLs are included or higher than $90 depending on condensate volumes which sometimes trade at a premium to light oil.

Heavy Oil (bitumen)

Heavy oil is a dense gooey liquid relative to water. It currently trades at a significant discount to light oil which historically has been around 20%.

Natural Gas Liquids (NGLs)

Natural gas liquids include Ethane C2, Propane C3 and Butane C4 production. Each type of NGL trades at different percentage to the price of oil. For example C2 might fetch 25% of WTI while C3 fetches 50% of WTI. The price realized per NGL barrel is usually the average of all 3 prices relative to oil.

The realized price per barrel of oil equivalent (BOE) will vary according to the commodity weighting and to the geographic area where oil is being marketed. Canadian producers operating in the Western Canada are under the mercy of price differentials for both oil and gas relative to US pricing. Canadian energy income trusts with US assets realize higher prices based on WTI oil and NYMEX natural gas pricing.

Oil & Gas corporations pay royalties to the owners of mineral rights from which they have leases. Royalties based on petroleum and natural gas sales include payments for provincial governments, individuals or other companies.

Average corporate royalty rates are impacted by well depths, well production rates, commodity prices and the production mix.

Operating Costs

Field operating costs, including transportation, per boe incurred in the extraction of oil and gas from the property and maintaining wells and related equipment and facilities.

Operating Netback

Operating netback reflects revenue per BOE adjusted for realized derivative gains and/or losses less royalties, transportation costs, and production expenses.

Funds Flow

The Cash Flow Netback per BOE represents how much profit per barrel the company earns after expenses have been paid. It is one of the most important metrics used by oil and gas investors when comparing a stock to its peers. It is calculated by subtracting General and Administrative costs as well as Finance Expense such as interest and taxes from the Operating Netback .

Using the Peer Comparison tool for any given stock, investors will be able to bring up a list of companies with a similar commodity weighting. You will notice that those with a higher EV/BOED multiple typically enjoy a higher cash netback per barrel.

The Funds Flow figure is the cash provided by operating activities calculated by multiplying the total number of barrels produced by the cash netback per barrel. The figure reflects a company’s ability to drive production growth through funding of future capital expenditures and the sustainability of distributions to shareholders if it’s a dividend paying company.

Basic Payout Ratio

The basic payout ratio is calculated as distribution paid per share divided by cash flow per share. This ratio represents how much of a company’s cash flow is being distributed back to investors. However, it does not take capital expenditures into account or any proceeds from the dividend reinvestment plan if there’s one.

Basic payout ratio > 100% means the company is distributing all of its earnings and more back to investors leaving no cash left to reinvest in its properties. It is simply a disaster as the scenario is unsustainable usually resulting in a distribution cut.

A ratio < 100% means there’s money left to develop assets or pay down debt. The lower the better, E&P companies typically try to keep the basic payout ratio below 60%.

Total Payout Ratio

The total payout ratio which is also known as the sustainability ratio is calculated using the following formula:

(Capital Expenditures + Distributions)/Funds Flow = Sustainability Ratio

This ratio is a visual indicator of a company’s ability to fund its distributions from cash flow and develop its asset base at the same time.

Sustainability ratio > 100% means the company is borrowing money to cover both its capital expenditures and distribution.

Systainability ratio < 100% means the company is able to fund its capital program and its distribution from cash flow. The extra can be used to improve the balance sheet, increase the distribution or accelerate production growth.

The sustainability ratio is extremely sensible to commodity pricing. E&P companies usually hedge a portion of their production to reduce volatility risk. Execution is also a risk factor because if the company misses its production guidance due to poor well performance cash flow will suffer as a result.

The Surplus/Deficit row indicates the amount of money the company ends up short or as extra after all is paid.

Dividend Reinvestment Plans (DRIP)

Investors can opt to participate in a dividend paying company’s DRIP program. Their dividends are directly reinvested in new equity rather than receive it in cash. Several companies offer DRIP participants varying discounts on share purchases (3-5%).

Issuing new shares on a monthly basis can be dilutive. Proceeds are often used by E&P companies to plug any funding deficits during the year or to pat down debt.

The Sustainability Ratio Net of DRIP shows the impact of the DRIP program on the company’s dividend sustainability. It’s usually a very bad sign when a company ends up in deficit EVEN after it recycles a substantial amount of its dividend back into the company. A high Deficit/Sustainability Ratio post DRIP is an indicator the distribution level is unsustainable and at risk of being cut.

Valuation

The valuation section has 4 key metrics used by many oil and gas analysts. While each one on its own provides useful information about the company, a combination of these metrics provide a potent evaluation tool when compared to peers.

CFPS or Cash Flow per Share measures the profitability of a company. It is calculated by dividing the annual funds flow of a company by its number of outstanding shares.

EV/BOED or the price per flowing barrel is the Enterprise value (EV) dividend by barrels of oil equivalent per day (BOE/D.) EV/BOED is one of the most widely used metric by oil and gas investors to gauge how cheap or expensive a company is compared to peers.

P/CF or Price to Cash Flow per share multiple is calculated by dividing the stock price by the cash flow per share. This metric provides an indication of relative value when compared to peers in the same industry.

DCF or Net Debt to Cash Flow ratio is calculated by dividing a company’s total debt by its cash flow. The ratio indicates a company’s ability to satisfy its debts. For oil and gas companies, the market hates to see the ratio above 1.5x. Usually the lower it is the better financial shape a company is in. Anything under 1.0x avoids punishment by the market in times of volatility and uncertainty.

These metrics are fluid as they reflect market sentiment, macro risks and volatility in commodity pricing.

Target Price

There are 2 metrics you can use to estimate your target price for a stock.

1. The first one is the target EV/BOED which values the company on a $ per flowing barrel basis. Let’s say you are currently analyzing the balance sheet of a Cardium focused player trading at $30,000/boe. You believe that once its exit rate guidance is hit in 6 months, the market will revalue the stock at $45,000/boe. Entering $45,000 in the target EV/BOED metric box and recalculating will produce a target price estimate providing you with the potential upside for the stock.
2. The second one is the CFPS or the cash flow per share multiple. Using the previous example, our Cardium focused company is cash flowing $1.00 per share next year. It is currently trading at a 3.0x CFPS multiple relative to its peers that are trading at a higher multiple. Simply enter the peer multiple in the Target CPFS box and recalculate to produce another target price estimate providing you with the potential upside for stock.

It is extremely important to remember that these metrics are great for comparison purposes but should not be used exclusively for investment decisions. An above average EV/BOED figure may simply reflect the premium valuation the market assigns to the management team. On the other hand, a lower than average CFPS multiple may simply indicate market worries about a company’s debt load.

CPFS & EV/BOED metrics can be easily compared to peers in the Peer Comparison section.

TakeOver Scenario

Merger and acquisition activity in the oil patch often triggers substantial moves in the stock price of companies with a similar operational profile to the acquired entity. For instance, upon the takeover announcement of Celtic Exploration by ExxonMobil in October of 2012, investors scrambled bidding up companies operating in the liquids-rich Montney shale play more than 20% in some instances.

The takeover section groups a select number of transactions with EV/BOED and EV/Reserve metrics which can be applied on any stock. There is no guarantee a stock will be acquired using the same metrics. However, investors can quickly come up with a theoretical takeover valuation for any stock sharing a similar operational profile to a previously acquired company.

For example, Whitecap acquired Cardium focused Midway Energy back in February of 2012. Investors in Hyperion Exploration – another Cardium focused junior, can apply the Whitecap-Midway transaction metrics on Hyperion to get a good idea of what it would potentially sell for if it was acquired.

The featured transactions are chosen based on a concentrated land profile and on the official transaction figures being provided by one of the 2 parties involved. With 1 click of a button, you get to run the acquisition metrics of your choice on any stock of your choice.

The 2P (proved + probable) reserves are generally updated on a yearly basis.

Peer Valuation

The peer comparison feature allows you to compare a stock of your choice to other stocks based on 2 attributes:  Gas Weighting and Dividends.

• Gas%: peer stocks will be selected using with a gas weighting within 20 basis point from your stock’s gas weighting.
• Dividends: A dividend paying stock will only be compared to other dividend paying stocks.

For example, if a user selects a junior producer with a 50% gas weighting, then the peers will be juniors/intermediate producers but with a gas weighting ranging between 30% and 70% (Gas% Range applied). If the company pays a dividend, then only dividend paying stocks are selected for comparison purposes.

The Gas% Range input box currently uses 20 basis points representing the natural gas percentage range. If you set it to 100, it means all junior non dividend paying companies are now included in the table. Modify the Gas% Range value if you wish to widen or narrow the comparison list. Notice that for Novus which has a Gas% weighting of 15%, the Gas% of its peers range between 0% (15- 20) and a maximum of 34% (15 + 20).

Peer comparison for Novus Energy

Once the peer comparison table is summoned, your stock gets highlighted in green for identification. The average row can be used to divide the producers around a particular metric making the identification of undervalued and overvalued securities easier.

If a dividend paying stock is being compared, a yield column will be added to the table as having a yield becomes one more condition for a stock to qualify as a peer.

When the Valuation checkbox is selected, the 3 most important comparison metrics are EV/BOED, Netback and EV/2P. You can click any column header to display the table in ascending or descending order according to the header of your choice. The Netback  figure is generated based on each company’s realized pricing, expenses and royalty rates. It is the same figure you see under Stock Analysis .

You may have often heard about a company trading at a premium valuation, well now you can see it. You will be able to easily identify who is trading at a premium and who is not. From our example above, you will notice that Pinecrest Energy and Raging River Exploration immediately shine for their top Netbacks and their high EV/BOED relative to peers (table was ordered by Netback ).

Peer Financial

When the Financial  checkbox is selected, the CFPS. P/CFPS and D/CF are displayed. You can click any column header to display the table in ascending or descending order according to the header of your choice.

Novus Energy peer comparison

The metrics displayed above are useful in identifying whose bottom line is affected the most vis a vis a change of price per commodity. That’s because the real expenses per boe (royalty, operating cost, finance expense and G&A) are used for each company. For example, order the the table by CFPS in descending order based on the default values of the Commodity Price Deck. Now increase the price of oil to $100 per barrel. Notice how you have to reorder the column because those companies with a higher Netback  will move up in the CFPS rank while companies with a lower Netback  benefit to a lesser extent and rank lower in the CFPS column.