Canada offers some of the world’s most accessible, large scale resource opportunities that investors can capture in two pure play buy recommendations – Encana (ECA) in natural gas and Canadian Oil Sands Trust (COSWF.PK) in oil. Four additional buy recommendations concentrated on oil, Canadian Natural Resources (CNQ), Cenovus Energy (CVE), Imperial Oil (IMO) and Suncor Energy (SU), offer similar appeal. The stocks trade close to the 200-day average except SU, which is below and CVE, which has not yet traded for 200 days. Oil price measured by six-year futures at $84 a barrel is close to the 40-week average of $86. At a median McDep Ratio of 0.79, the six large cap Canadian buys are undervalued by our analysis at any long-term oil price above $59 a barrel.
Respected corporate buyers are validating the undervaluation signaled by the McDep Ratio, a sign of expected gains in resource value. Buying assets similar to those held by ECA, ExxonMobil (XOM) expects to complete its acquisition of natural gas producer XTO Energy this month while Royal Dutch Shell (RDS.A) announced a $5 billion acquisition of a private shale gas company last month. Sinopec, the second largest oil company in China, will likely soon close its acquisition of a 9% interest in the Syncrude oil sands mine and upgrader owned 37% by COSWF, 25% by IMO and 12% by SU. There are few countries in the world where large companies have access to long-life resources on better terms than in buy-recommended Canadian oil and gas producers.
Today we raise our estimate of Net Present Value of CVE to US$37 a share from $32 to take account of probable reserves now allowed to be disclosed voluntarily under the regulations of the U.S. Securities and Exchange Commission. Higher NPV reduces McDep Ratio to rank CVE in line with peer companies at 0.78 within a range of 0.70-0.81. A tight range in McDep Ratio matches a tight range in cash flow multiples, EV/Ebitda and PV/Ebitda.
Long life ranges from 17-31 years as measured by adjusted reserves (proven plus half of probable) divided by next twelve months production. IMO is the only remaining exception to including probable reserves for Canadian companies in our analysis. Our brief emphasis on high-probability contingent resources for Encana has been replaced by probable reserves of nearly the same magnitude. Latest company models provide further insight by business segment.
Originally published on June 1, 2010.