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Number Cruncher Four Canadian oil producers that could benefit from U.S. sanctions on Venezuela

What are we looking for?

Canadian oil producers positioned to fill the void left by U.S. sanctions on Venezuela.

The screen

Venezuela has more proven oil reserves than any country in the world, according to the U.S. Energy Information Administration. Before the United States announced new sanctions on Venezuela last month – part of an international campaign seeking President Nicolas Maduro’s ouster – it was importing roughly half a million barrels a day of Venezuelan oil. The United States produces lighter crude, so despite being the world’s biggest producer of oil, the country needs to import heavier varieties, such as that produced in Venezuela. Or Canada.

Ordinarily this would be a big opportunity for Canadian producers to step in and fill the supply gap. But pipeline constraints mean oil would have to be shipped by rail, which is more expensive, costing roughly US$20 a barrel versus roughly US$12.50 if shipped by pipeline. Last year, when West Texas Intermediate was selling for about US$50 more than Western Canada Select, shipping by rail would still have been economic for Canadian producers.

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Now, not so much: The Alberta government’s recent curtailment on production has lowered this spread to only US$13. However, the disruption to U.S. supply from the Venezuela sanctions and/or the easing of the curtailment in Alberta could increase the spread and make shipments by rail economic. We will look at which Canadian companies could potentially take advantage of the gap left by U.S. sanctions on Venezuela should price differentials widen.

First, we look for oil companies that are increasing output. We compare the Refinitiv StarMine SmartEstimate of production (barrels of oil a day) for this year with actual average production last year and require a forecast increase of at least 30 per cent. Note: The SmartEstimate will be a more useful measure than the consensus estimate because it automatically removes estimates that haven’t been adjusted since major market events such as a government intervention.

Next we look for companies that can manage this increased output at a low level of operating cost. For this, we use the mean forecast for operating expense (OPEX) per barrel and require a measure of less than US$10.

Finally, to make sure we’re getting these stocks at a good value, we use the StarMine Relative Valuation Rank, which considers five different valuation ratios. We use the oil and gas industry as the peer group and require a percentile score greater than 75.

More about Refinitiv

Refinitiv, formerly the financial and risk business of Thomson Reuters, is one of the world’s largest providers of financial markets data and infrastructure, serving more than 40,000 institutions worldwide. With a dynamic combination of data, insights, technology and news from Reuters, our customers can access solutions for every challenge, including a breadth of applications, tools and content – all supported by human expertise.

What we found

The screen yields four companies. Birchcliff Energy Ltd. has the highest forecast production increase as well as the highest forecast dividend yield after the company announced it was increasing its dividend by 5 per cent on a Feb. 13 earnings call. The company is expected to also produce about $50-million in free cash flow for the year on top of its dividend, allowing it to either reduce debt, explore strategic acquisitions or further increase production.

Oil producers that could fill the supply gap

CompanySymbolMkt. Cap. ($ Mil.)Forecast Production Increase (%)OPEX Per Barrel ($)Relative Valuation RankRecent close ($)1Y Rtn. (%)Div. Yield (NTM SmartEstimate, %)
Birchcliff Energy Ltd.BIR-T940.41703.29793.5518.96.2
Crew Energy Inc.CR-T140.61515.43770.93-45.00.0
Arc Resources Ltd.ARX-T3,588.5467.349010.14-17.05.9
Advantage Oil & GasAAV-T433.8301.79792.33-37.40.0

Source: Refinitiv

Investors are advised to do their own research before trading in any of the securities shown here.

Hugh Smith, CFA, MBA, is an investment management specialist at Refinitiv.

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