Where to find value in the energy sector

Canadian energy stocks look more appealing than their U.S. peers on a valuation basis, but Macquarie Scientific studies are finding better opportunities in natural gas-weighted names.

Analyst Brian Bagnell noted the median estimated EV/DACF valuation according to oil and gas futures strip prices has climbed to 13.6x within the U.S., while Canadian names are trading at 12.1x.

A look into 2017 forecasts implies that the multiple on U.S. energy stocks falls to 12.9x, however in Canada time falls more sharply to approximately 11.0x.

“In our opinion, this is a very modest amount of compression on both sides of the border, suggesting most stocks remain expensive even on 2017 multiples,” Bagnell said inside a research note.

With large cap names generally trading confined to small and mid-cap energy stocks, the analyst sees better opportunities within the latter group.

The implied gains in forward natural gas prices within the next year also has him favouring gas-weighted names.

Canada’s Birchcliff Energy Ltd. and Houston-based Cabot Oil & Gas Corp. stick out among gas-weighted names according to 2017 forecasts, with Bagnell highlighting the substantial valuation compression implied for 2017.

The analyst also highlighted TSX-listed Advantage Oil & Gas Ltd., Peyto Exploration & Development Corp., and RMP Energy Inc. as relatively attractive names according to figures for 2016 and 2017.

Among oil-weighted producers, Granite Oil Corp., Tamarack Valley Energy Ltd., and U.S.-based PDC Energy Inc. stand out among small , mid caps, while Husky Energy Inc. was designated being an attractive large cap name based on 2017 metrics.