Buying American Oil Cheap From Canadian Companies

by: MLP Trader

This year has seen the utter collapse of the Canadian Oil Exploration and Production (E&P) sector. Companies like Pengrowth (NYSE: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 (OTC:ANGYF) 72% 10.3% 99%


Eagle Energy Trust (ENYTF.PK) 96% 15.4% 83% $80,667
Parallel Energy Trust (OTC:PEYTF) 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 (OTCPK:PNCGF) $53,600 $63.97 $838
Eagle Energy $80,667 $51.17 $1,576
Pengrowth $36,515 $22.37 $1,632
Enerplus (NYSE:ERF) $42,386 $24.65 $1,720
Penn West $49,735 $24.72 $2,012
Argent Energy (OTC:ANGYF) $97,972 $45.47 $2,155
Parallel Energy Trust (OTC:PEYTF) $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.

Disclosure: I am long OTCPK:PNCGF, ENYTF.PK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.