Hidden Diamonds In Canadian Small-Cap Energy Companies

by: Bruce Vanderveen

Look to Canada's Toronto Stock Exchange (TSX) for buried treasure - black gold treasure that is. Many of the TSX's oil and gas companies have been beaten-down over the last couple years and now offer exceptional value to investors.

These undiscovered jewels are often low in debt, rich in reserves, operate in safe environments, and may pay generous (sometimes 10% or more) monthly distributions. In this article I will profile 3 of these little-known companies.

The Toronto Stock Exchange (TSX)

A large number of energy companies trade on the TSX. Many, of course, operate in Canada. An unexpected number though, have some or even all their operations outside of Canada. Two of the three companies profiled below, though based in Calgary, operate exclusively in the U.S.

Many of the smaller companies trading on the TSX have Pink Sheet equivalent tickers which make it easier for U.S. investors (Some U.S. brokers do not trade the TSX, or if they do, charge higher commissions.) For example, Argent Energy Trust's symbol on the TSX is AET-UN.TO and its pink sheet equivalent is ANGYF.PK.

A Cautionary Note For Pink Sheets Trading

Trading volumes on Pink Sheet tickers can be low. Therefore, investors should always use limit orders and be prepared to wait a bit (sometimes more than a day) for execution.

If, your broker does not trade the TSX and you do not like waiting, you may wish to open an account with a broker who trades the TSX.

Why Now May Be A Good Time To Invest

At first glance, with both WTI and Brent nearing $110/bbl, now does not look like a good time to invest in energy. To make matters worse, oil supply currently exceeds demand as U.S. shale oil production keeps posting records. Overseas the EIA predicts Iraq (already one of the world's largest producers) will double production by the end of the decade. All this as gasoline demand stagnates or falls in most developed countries and growth slows in China.

When one looks deeper, however, other factors come into play. Saudi Arabia and Russia, the world's two largest exporters show declining exports as production slows and domestic demand booms. In the Middle East, Iran (which may have the bomb in a year) is boycotted. Egypt and Syria are falling into civil war and the Sunni-Shiite conflict is escalating. With U.S. troops gone, the situation in Iraq is deteriorating (despite the EIA's rosy predictions).

It all makes those peaceful mountains and prairies of Canada and the Central U.S. look very enticing. This may be the reason why WTI and Edmonton Par now trade close to Brent - the spread was over $25 earlier this year.

Some well known Canadian energy income stocks such as Pengrowth Energy (NYSE:PGH) and Penn West Energy (PWE) bottomed a few months ago. Now it may be the small-cap's turn to rise.

This article profiles three Canadian based, small-cap energy income stocks. All three pay monthly distributions with an annual yield of 10% or more.

Statistical data below is sourced from oilandgas-analysis.com. Debt/equity ratios are from Yahoo finance.

Argent Energy Trust (OTC:ANGYF)

Argent, ($490 million market cap) is according to its website an "oil and natural gas focused, distribution-producing investment" whose main objective is to "create stable and consistent returns for investors through the acquisition and development of oil, and natural gas reserves and production with low risk exploration potential."

This Calgary-based company operates primarily in Texas (Austin Chalk and Eagle Ford), and has paid a consistent monthly dividend of $.0875 since its IPO in September 2012. The annual yield is 10.3%.

Dividend sustainability: Argent's per share payout (distribution/cash flow) ratio is 64%. If you factor in capital expenditures (distribution+capital expenditures/cash flow) the payout ratio is 99%.

Production and Reserves: Production is 72% liquids and the $EV/2P ratio (Enterprise Value/proven+probable reserves) is 16.3.

Financials: Argent has a low debt/equity ratio of 14%. The price to cash flow per share (P/CFPS) ratio is 6.1 and the Netback (how much profit per barrel the company earns after expenses) is $39.

Eagle Energy Trust (ENYTF.PK)

According to its website, Eagle Energy Trust's (market-cap: $233 million) goal is "to acquire and exploit conventional long-life hydrocarbon reserves in certain established on-shore production basins in the United States."

The company operates in Texas (Luling area south of Austin and the Permian basin). Eagle has paid a monthly dividend of $.0875 since January of 2011. The annual yield 12.9%.

Dividend sustainability: Eagle Energy's per share payout ratio (distribution/cash flow) is 77%. Taking into consideration capital expenditures (distribution+capital expenditures/cash flow) the payout ratio is 86%.

Production and Reserves: Production is 87% liquids and $EV/2P ratio (Enterprise Value/proven+probable reserves) is 15.7.

Financials: Eagle Energy has a low debt/equity ratio of 16%. The price to cash flow per share (P/CFPS) ratio is 6.0 and Netback is $37.

Twin Buttes Energy (TBTEF.PK)

Twin Buttes, with a $425 million market cap, is according to its website "focused on a low risk development in heavy oil." The company claims its "capital efficiency will allow us to fund both the dividend payment and our capital program within cash flow."

Twin Buttes operates in the Lloydminster area of Alberta. It has paid or declared a monthly dividend of $0.15 or $0.16/share for the last 2 years. The annual yield is 11.0%.

Dividend sustainability: Twin Butte's payout ratio (distribution/cash flow) is only 38%. Taking into consideration capital expenditures (distribution+capital expenditures/cash flow) the payout ratio is 100%.

Production and Reserves: Production is 89% oil (83% heavy). The $EV/2P ratio (Enterprise Value/proven+probable reserves) is not available but the 2012 annual report claims 31,800/Mbbl of reserves.

Financials: Twin Buttes has a debt/equity ratio of 43.6%. The price to cash flow per share (P/CFPS) ratio is low at 3.5. Netback is $20.


Will the high dividend-paying companies on the TSX be able to maintain their current payouts? At this point, considering the recent uptick in Canadian and WTI crude prices, it looks like they may.

The above three companies are currently able to cover their distributions - even after capital expenditures. Since crude prices have risen in recent months distributions will likely be maintained or possibly increased in the near future.

Oil is notoriously volatile and prices may fall if geopolitical tensions ease. Yet, even with distribution cuts the assets are in the ground - buried treasure if you will - and distributions will likely increase with prices once again.

Disclaimer: This article is informational and not investment advice. Investors are urged to do further research before deciding if any of the companies mentioned fit their goals and are worthy of their investments.

Disclosure: I am long PGH, PWE, 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.