The intrinsic value of Canadian oil stocks and what Trump’s proposed tariff would mean for them
What are we looking for?
Is U.S. president-elect Donald Trump’s proposed 25-per-cent tariff on Canada and Mexico a negotiating tactic to secure U.S. borders and stem drug flow, or will he actually issue an executive order on Jan. 20? On Nov. 26, the day after Mr. Trump posted his proposal on Truth Social, the S&P/TSX Capped Energy Index fell 2.2 per cent. How would the tariff affect Canadian oil exports and stock prices for Canadian producers?
The screen
We used stockcalc’s screener to select the top 10 oil and gas stocks by market capitalization listed on the Toronto Stock Exchange. We then used stockcalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- a price comparables (price comps) technique values a company on the basis of ratios from selected comparable companies;
- an adjusted book value (ABV) is calculated by multiplying a company’s book value per share by its 10-year average price-to-book ratio;
- if there is analyst coverage, we may consider the consensus target price.
More about stockcalc
Stockcalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. Stockcalc also contains numerous tools to understand what stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to stockcalc using the promo code “Globe30,” which offers a 30-day free trial and special pricing for the second month.
What we found
You can see in the accompanying table the percentage difference between each stock’s recent close price and its intrinsic value. The “stockcalc valuation” column is a weighted calculation derived from our models and analyst target data if used.
Background: In 2023, Canada produced 5.1 million barrels a day of crude oil, with 4.3 million barrels exported to the United States, 84 per cent of Canada’s total oil production. In 2022, Canada produced 15.6 billion cubic feet a day of marketable natural gas, exporting 8.3 billion cubic feet to the U.S.
Canadian crude oil imports constituted 24 per cent of U.S. refinery throughput, and natural gas imports from Canada accounted for 9 per cent of total U.S. natural gas consumption.
Alberta’s share constituted 87 per cent of the total volume of oil and gas exported to the U.S.
Patrick De Haan, head of petroleum analysis at GasBuddy, says U.S. gasoline prices could rise 30 to 40 US cents a gallon under Mr. Trump’s tariff plan. Other analysts say gas prices in the Midwest could be even more vulnerable because of the large inflow of Canadian oil there, with prices rising upward of 75 US cents a gallon.
Investors hold Canadian oil and gas stocks for growth when oil prices rise, and for dividends, with 3- to 4-per-cent yields common for large firms. The median EV to EBITDA multiple (enterprise value to earnings before interest, taxes, depreciation and amortization) for Canadian oil and gas stocks over the past 10 years is about 5, and it varies from 4 to 7 for upstream, midstream or downstream firms.
The valuation impact under a 25-per-cent tariff therefore lies in that multiple and the cash flow that these companies generate. A reduction in the multiple at the same time as a reduction in free cash flow would have a compounding negative impact on share price. A drop of 1 in the multiple along with a 20-per-cent drop in free cash flow would mean a valuation reduction approaching 40 per cent.
We can play out a number of scenarios, but the impact of different combinations grows quickly.
Another of the many considerations, of course, is how the underlying price of oil behaves in this environment. We would also expect Canadian companies to start looking for new export markets, but that could be a long and expensive process. With that, our table shows valuations we have under the existing (non-tariff) scenario and company highlights include:
Cenovus Energy Inc. CVE-T produces conventional crude oil, natural gas liquids and natural gas in Alberta, with refining operations in the U.S. The company reported $600-million in free cash flow in the most recent quarter along with $1.1-billion in share buybacks and dividends. Our models show upside to the current stock price.
Tourmaline Oil Corp. TOU-T is engaged in natural gas and crude oil acquisition, exploration, development and production in the Western Canada Sedimentary Basin. Its operations include the Alberta Deep Basin, the Northeast B.C. Montney and the Peace River Triassic Oil complex. Our models for Tourmaline’s share price are below current analyst consensus and show the company as slightly overvalued.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.