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What's Boosting Canadian E&Ps to the Top of the Oil Charts?

Even though the price of crude is hovering around the $50 per barrel mark since the beginning of the year, an improvement from the year-ago level is already in evidence. Given such a backdrop, investing in of oil and gas upstream companies seems prudent as these firms are posed to gain the most.

By now, it’s well known that the crude price recovery was mainly backed by OPEC’s November deal to curb output. The historic accord, together with help from non-OPEC producers have seen oil prices more than double from their last February lows to around $50 a barrel. Analysts now expect the OPEC deal to be extended beyond Jun 2017, further strengthening oil prices.

In such circumstances, it is highly probable that oil’s bullish run will benefit the overall upstream business or the oil exploration and production (E&P) operations. This, in turn, will generate more lucrative returns for investors.

What Does the Future Hold for Canadian E&P Industry?

Among the industries in the Oil & Energy sector, Oil & Gas-Canadian Exploration & Production is ranked #19 and lies in the top 7% of industries. Investors should know that that the top 50% of the Zacks Ranked industries is likely to outperform the bottom 50% by a factor of more than two to one. For more information please refer to our Zacks Industry Rank.

Major companies belonging to the industry include Gran Tierra Energy Inc. GTE, Enerplus Corp. ERF, Encana Corp. ECA and Canadian Natural Resources Ltd. CNQ. We note that Gran Tierra sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Oil price improvement should bode well for the Canadian E&P industry as the companies belonging to this sector will be able to sell the commodity at higher prices.

Could the Industry Reap More Return Than S&P 500?

So far, the Zacks Industry Rank for the Oil & Gas-Canadian Exploration & Production industry is impressive. Also, we have compared the industry with the S&P 500 Index to find a clearer picture.

Investors should know that the S&P 500 Index is basically a U.S. stock market index that reflects the market capitalizations of 500 large companies listed on the NYSE or Nasdaq.

Here we have employed certain parameters to compare the industry with the S&P 500 Index. Let’s analyze the factors. Let’s delve deeper to find out if the Oil & Gas-Canadian Exploration & Production industry is better placed than the index in the following parameters.

Price Performance

Over the last one year, the Oil & Gas-Canadian Exploration & Production industry has outperformed the S&P 500 Index.

During the aforesaid period, the industry gained 17.5% compared with 15.1% increase for the index.

Dividend Yield

Dividend yield is among the few important parameters that investors usually consider before investing in a particular sector.

The current dividend for the Oil & Gas-Canadian Exploration & Production industry is 2.03%, which is higher than 1.9% yield for the S&P 500 Index.

Cash Flow Yield

Cash flow yield refers to the amount of free cash flow per share that a company will reward investors who buy the share at market prices. The same concept can be employed for the industry and the index for a better comparison. 

The current cash flow yield for the Oil & Gas-Canadian Exploration & Production industry is 11.3%. Clearly, this is almost twice the 5.9% yield for the S&P 500 Index.

Debt-to-Equity Ratio

The ratio signifies the financial leverage of the industry and provides an idea of how much leveraged the industry is in comparison to the index.

Presently, the debt-to-equity ratio for the Oil & Gas-Canadian Exploration & Production industry is 56.43%. The ratio for the S&P 500 Index is 82.46%. Evidently, the industry is less leveraged than the index.

Investors should know that over the last two years the long-term debt for the industry has been decreasing sharply.

EBITDA Margin

Earnings before interest, tax, depreciation and amortization (EBITDA) represent earnings from core operations. EBITDA margin determines how much operating profit the company is generating out of its revenues. No wonder, this is a vital parameter for determining the profitability of the industry.

Presently, the trailing twelve month EBITDA margin of theOil & Gas-Canadian Exploration & Production industry is 26.74%, slightly higher than 26% margin for the S&P 500 Index. Moreover, the average EBITDA margin over last one year is 31.11%, which is more than 26.1% margin for the index.

Conclusion

Our analysis clearly shows that the parameters tilt the scale in favor of Oil & Gas-Canadian Exploration & Production industry.

The industry’s better EBITDA margin and less leverage than the S&P 500 Index indicate its profitability. Most importantly, the dividend yield of this industry is also higher. Overall, the Oil & Gas-Canadian Exploration & Production space appears to be lucrative and investing in stocks from this industry may be a good idea at the moment.

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Encana Corporation (ECA): Free Stock Analysis Report
 
Canadian Natural Resources Limited (CNQ): Free Stock Analysis Report
 
Enerplus Corporation (ERF): Free Stock Analysis Report
 
Gran Tierra Energy Inc. (GTE): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
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