Six buy recommendations among Canadian producers include five concentrated on oil, Canadian Oil Sands Trust (OTCQX:COSWF), Suncor Energy (NYSE:SU), Imperial Oil (NYSEMKT:IMO), Canadian Natural Resources (NYSE:CNQ) and Cenovus Energy (NYSE:CVE) as well as one concentrated on natural gas, Encana (NYSE:ECA). The five oil producers trade at McDep Ratios ranging from COSWF at 0.70 to CVE at 0.95. ECA has a stock price near Net Present Value (NPV) while some U.S. peers have recently crossed a McDep Ratio of 1.0 and trade above NPV.
COSWF offers income anticipated to be 6.3% for the next twelve months including an increase expected to be announced on January 28. McDep Ratios were unusually low during the global financial panic. Unlevered returns have been strong since then and we look for further gains ahead. Recent news of the resignation of Alberta’s energy minister may be a sign of a better provincial royalty (tax) program to further undo the damage of the untimely increase of a few years ago.
Finally, the trend in long-term oil price continues upward with current quote of $88 a barrel above the 40-week average of $81. Natural gas has unusually strong potential to outperform oil in the 2010s.
Originally published on January 19, 2010