Today, we'll examine three promising Canadian energy companies. These include Enerplus Corporation (NYSE:ERF), Penn West Petroleum (NYSE:PWE), and TransCanada Corporation (NYSE:TRP). This risk / opportunity analysis will present potential investment options to investors and thus enable them to determine which securities (if any) are best suited for their portfolio.
Today, so much in Canada focuses on the Keystone XL pipeline, but it's only part of the large energy producer picture in the provinces. What's interesting and what sets Canada apart are some of its incredible opportunities in the energy sector, many of which are either not readily available or not widely known to many investors. In addition, these frequently ignored plays often offer investors incredible (and unique) income and potential domestic (as well as global) growth opportunities.
So, let's examine Penn West and Enerplus. Penn West declares quarterly dividends. Currently, the stock yields roughly 6.4% in passive income. In 2011 Penn West converted from a royalty trust to a corporation. The impact for income investors was instead of receiving monthly distributions; the company paid out dividends quarterly. Fortunately, Penn West has a dividend reinvestment plan (DRIP) which discounts additional share purchases 5% from the current market price. The company also currently exploits oil and natural gas reserves in Alberta, British Columbia, Saskatchewan, Manitoba, and the Northwest Territories.
Whereas, Enerplus is a Canadian oil and natural gas exploration company, which operates primarily in North Dakota, West Virginia, Maryland, and Pennsylvania. Unlike Penn West and TransCanada this Canadian energy trust throws off monthly distributions to shareholders. Currently, the stock yields 4.9%. The company also has DRIP which allows investors to purchase additional shares with a 5% discount to current market prices.
Third; TransCanada is a Canadian-focused pipeline company currently embroiled in the cross border XL Keystone dispute. The corporation pays regular quarterly dividends with a current yield of 3.8%. The stock also has a no cost DRIP, which reinvests dividends in additional TransCanada shares as well as allows investors to make additional commission free optional cash purchases at 100% of the market price-no discount.
In terms fundamentals germane to income investors they include the following: 1.) beta; 2.) dividend growth; 3.) payout ratio; and 4.) historical dividend payouts:
So, which stock should you invest in? In brief; the answer is multifold. TransCanada is perhaps the most financially sound of the three given it has the lowest payout ratio, has been paying steady dividends for 15 years and has increased its dividend by a prudent amount year-over-year. However, Penn West and Enerplus are arguably on shakier footing. Given each stock's significantly higher payout ratios, shorter commitment to a steady dividend and in Enerplus' case a shrinking payout, make these stocks potentially more risky and thus ostensibly less attractive for prospective investors.
Lastly, examining each company's beta is a good rule of thumb when considering the "sleep factor." The sleep factor is how much peace of mind income investors possess both in dividend confidence, but also protection of principle and even corporate solvency. In general, a beta greater than 1.0 is considered volatile and less than 1.0 more averse to major stock price fluctuations. Therefore give the (above-mentioned) metrics, TransCanada is the only company with a low beta (0.64). Thus, it is the only stock meeting the "sleep factor" criteria. Investors should bear this metric in mind prior to, during, and after potential investment.
Again, given the (above-mentioned) metrics, Penn West and Enerplus are both considerably riskier than TransCanada. However, as a Canadian royalty trust; investors could effectively make a (potential) long-term play on the energy markets. Using the company's stock purchase program, additional shares could be used as a hedge against your additional cost basis. This margin of safety both protects principle as well as allows greater opportunity to achieve significant gains both in increased dividend and share price.
Much the same way, Penn West's 5% market price (purchase) discounts also hedge against both fluctuating share and commodity prices. In the meantime, investors continue to collect handsome yields while collecting large regular payouts. As for TransCanada, the company offers superior value while enabling more risk adverse investors sleep at night. Of the three, I consider TransCanada the most financially sound in terms of risk/reward, and therefore the "best in breed."
Seeking Alpha Bottom Line
In sum, while each of the (above-mentioned) stocks offers investors opportunity in both income and potential capital appreciation, each carries unique risk and role as part of both Canada's economy as well as the greater global energy marketplace. While I think investing in commodities such as energy can potentially be an effective hedge as part of an overall well-diversified portfolio; I would caution investors not to get too overzealous about investing in any one sector of Canada's economy. Rather, as in the United States, a broad diversification strategy should be employed to both capture upside as well as limited losses during times of economic turmoil. By adopting a long-term "buy and hold" strategy investors will realize maximum gain while assuming prudent risk. However, every investor's financial circumstances differ and one should do their due diligence prior to, during, and after investment.