The Canadian oil and gas sector has been hit hard in recent times. With valuations approaching levels we haven’t seen since the oil bear market 6 years ago, the industry seems dead in the water.
With talks of renewable energies, reduction of plastic usage and cars that don’t need fossil fuels to operate, it’s easy to think the sector is doomed.
However, oil isn’t going anywhere anytime soon. While the inevitable passing of the baton to much cleaner resources will eventually happen, it’s not going to happen overnight. The industry is due for a recovery, and when it does, these two stocks could provide significant returns to patient investors.
Advantage Oil and Gas (AAV.TO)
Advantage Oil and Gas (TSX:AAV) is primarily engaged in the exploration, development and product of natural gas at its Motney resource play in Glacier, Alberta. The company’s assets generate significant free cash flows, which are consistently being reinvested back into the company to expand operations. The stock has taken a beating as of late, losing over 60% of its value in the last year. What investors are left with is a stock that is trading at extremely promising valuations, and significant upside potential.
AAV is trading at only 8 times forward earnings, and a price to book of 0.25. There are plenty of reasons to be bullish on this junior producer.
Advantage Oil and Gas increased production in its most recent quarter to 44,990 boe/d, which is 13% higher than last quarter. The company also reported a debt to adjusted funds flow of 1.9. If you’re unsure of what the DACF is, it is a measure used often in the oil and gas industry that is preferred over the Price to Cash Flow (P/CF) ratio as it takes financing costs, like exploration and after tax financing costs into account. A DACF of 1.9 means Advantage will move forward with stronger financial flexibility.
The company is continuously expanding operations, drilling 5 wells and announcing the completion of 2 others at Valhalla, along with the completion of 10 wells at east Glacier. The company has stated it wants to grow production to over 52,330 boe/d by 2021 and expects to grow free cash flows by over 30% a year.
Analysts are bullish on the junior oil and gas company, and they have placed a 1 year target estimate of $3.68 on Advantage Oil and Gas, which signals a whopping 112% upside.
Whitecap Resources (WCP.TO)
Whitecap Resources (TSX:WCP) is another junior oil and gas producer that holds assets across some of the richest areas of Western Canada with operations in BC, Alberta and Saskatchewan.
The company’s share price is down over 50% over the last year, and as a result is trading at extremely cheap valuations with a very lucrative dividend. Most investors would fear a dividend cut, however the company’s CEO has come out and said it has no plans to cut its dividend moving forward. In fact, the company hopes to keep increasing it.
Whitecap is currently trading at only 9.84 times forward earnings with a price to book of only 0.57. Its dividend is north of 7%, and although its payout ratio looks terrifying at 800%, the dividend is well covered by cash flows.
During this economic downtime, Whitecap is strategically cutting production and instead looking to strengthen its balance sheet so it can take advantage of the inevitable recovery.
The stock is a consensus buy from analysts. With a 1 year target estimate of $8.32, the company has nearly 100% upside from today’s price.
Locking in a near 7% yield and 100% upside potential seems like too good of an opportunity to pass up.
How long until these oil and gas investments pay off?
It’s a question that is often asked, and it is difficult to answer. Until the industry recovers, you can expect significant volatility from most oil and gas producers, especially the junior companies. However, if you’re willing to be patient, there are some diamonds in the rough that are sure to provide outsized gains when the sector makes a comeback.
The key to prospering from market insecurity in the oil and gas sector is to find companies that have a clear path to growth and low costs. Advantage Oil and Gas and Whitecap Resources are two that may be worth taking a shot on. If you’re looking for some major oil and gas players, check out our list of the top oil and gas stocks in Canada.