This year has seen the utter collapse of the Canadian Oil Exploration and Production (E&P) sector. Companies like Pengrowth (PGH) and Penn West (PWE) are trading near their 2009 crash levels. This is for good reason: the surge in American oil production has created an oil glut in the mid-continent, leaving Canadian oil with nowhere to go. As a result, Western Canadian Select (WCS) oil has been selling for $40/BBL less than Brent crude and Canadian producers have gotten crushed.
There are several Canadian companies that operate entirely in the U.S., but have thrown out with the Canadian E&P bathwater. Investors have overlooked the fact these companies are getting an extra $20 per barrel over their peers who operate in Canada. Some of these companies are steals at the current prices. In particular there are several new-style trusts, which by Canadian law can only operate outside of Canada. These trusts offer extremely attractive yields and compelling valuations.
| Company | Liquids Production | Yield | Payout Ratio with DRIP | Price per BOEPD |
|---|---|---|---|---|
| Argent Energy Trust (ANGYF.PK) | 72% | 10.3% | 99% | $98,146 |
| Eagle Energy Trust (ENYTF.PK) | 96% | 15.4% | 83% | $80,667 |
| Parallel Energy Trust (PEYTF.PK) | 64% | 13.9% | 69% | $61,537 |
In a previous article, I described a method to value E&P companies based on both their production and their netbacks. This helps weed out companies that look like bargains, just because they produce lots of natural gas or low-margin oil. Instead of considering the "flowing barrel" price of a company by itself, we multiply it by the per-barrel netback. Following are the numbers for energy trusts that operate in the U.S., along with some other Canadian companies.
| Company | EV/BOEPD | Netback | EV/(BOEPD*netback) |
| Pinecrest (PNCGF.PK) | $53,600 | $63.97 | $838 |
| Eagle Energy | $80,667 | $51.17 | $1,576 |
| Pengrowth | $36,515 | $22.37 | $1,632 |
| Enerplus (ERF) | $42,386 | $24.65 | $1,720 |
| Penn West | $49,735 | $24.72 | $2,012 |
| Argent Energy (ANGYF.PK) | $97,972 | $45.47 | $2,155 |
| Parallel Energy Trust (PEYTF.PK) | $61,459 | $25.72 | $2,390 |
The numbers are from 2012 production, so we can expect that companies with Canadian production--Pinecrest, PWE, ERF, and PGH-- will see considerably lower netbacks in 2013.
Based on this measure, Eagle Energy looks a clear winner among the group. A company that garners $50 netbacks on Texas oil production and trades at only $80,000 a flowing barrel is an absolute steal right now. This is confirmed by a look at the respective cash and debt numbers.
| Company | Price/Cash flow per Share | Debt/Cash Flow |
|---|---|---|
| Argent Energy | 6.1X | 0.7X |
| Eagle Energy | 5.0X | 0.9X |
| Parrallel energy | 5.0X | 4.6X |
Eagle Energy Trust operates in two regions, both in Texas: Luling/Salt Flat field and Midland/Permian Basin. It is able to sell the bulk of its oil at premium to West Texas Intermediate ((WT)I) prices. According to management, heavy tax-loss selling by institutions drove the share price dramatically lower in December. It looks like a steal at the current valuation.
