West Texas Intermediate, the North American crude oil benchmark, fluctuated between US$57 and US$62 last week after the attack on Saudi Aramco, the world’s largest exporter of petroleum. The Saudi incident in and of itself will not revive the fortunes of Canada’s energy sector, but it did cause some stock prices of companies in the sector to surge, however briefly.
For the Globe and Mail this week, we look for Canadian companies involved in oil and gas production, extraction and distribution, with a focus on quality and sustainability, amid global geopolitical tensions.
We screen the domestic energy sector for companies by using the following criteria:
- Market capitalization greater than $2-billion;
- A positive change in the 12-month net operating profit after tax (NOPAT) – a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
- A future-growth-value-to-market-value ratio (FGV/MV) between minus 50 per cent and 50 per cent, to exclude companies with exaggerated discounts or premiums. FGV/MV represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;
- Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent;
- Economic performance index (EPI) greater than 0.5 and growth in the 12-month EPI, which is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. For EPI, anything above one is favourable – the higher the figure the better.