This Unconventional Metric Is The Key To E&P Outperformance

In a new report, Raymond James analyst Jeremy McCrea explained how conventional tools for assessing energy E&P stocks typically miss the mark. Instead, McCrea used Raymond James’ five-point checklist to search for value among Canadian E&P stocks.

Convention Isn’t Working

According to McCrea, conventional metrics used by investors fail to effectively differentiate winners and losers when it comes to E&P stocks. “Common metrics such as payout ratios, CFPS, production growth rates, and valuation metrics (EV/DACF and 2P NAV Valuations) do not truly demonstrate the profitability of a business and the long-term share price performance,” he added.

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The Alternative

Instead of conventional metrics, McCrea explained that PDP (Proved-Developed-Producing) Equity Value Creation is the best indicator of share price outperformance. In fact, over the past two years, stocks of companies with the largest increases in PDP equity value have risen 17 percent compared to the average 43 percent decline of the rest of the E&P field.

Five-Point Checklist

To assess and compare E&P names, Raymond James has developed a five-point checklist that captures the critical elements of PDP equity growth. The checklist includes the following five factors:

• 1. Management
• 2. Asset Economics
• 3. Growth/ROC
• 4. Leverage
• 5. Valuation

Top Stock Picks

By using this checklist, Raymond James analyzed the Canadian E&P group and came up with the top stocks of the bunch. Among E&P names on the Toronto Stock Exchange, Raymond James names Kelt Exploration Ltd. and Painted Pony Petroleum Ltd as Strong Buys.

The firm rates the following TSX-listed stocks at Outperform:

• ARC Resources Ltd.
• Bonavista Energy Corporation
• Bonterra Energy Corp.
• PrairieSky Royalty Ltd.
• Yangarra Resources Ltd.

Disclosure: The author holds no position in the stocks mentioned.