Thursday, August 14, 2008

is oil dropping to $60/barrel?

Looking at the shares Canadian integrated oil and gas firm Petro Canada (PCA) you would assume that oil is on the way down to where it was in the days where you could pay 20 bucks to fill up your car.

If we can forget about $60 oil and $0.60/L gas, then Petro Canada shares are looking cheaper than the samples at Costco. The stock is now trading at a Price to Earnings (P/E) ratio of a staggering 5.8x trailing earnings. This comes after a 77% profit gain and a 54% dividend raise in the most recent quarter. Is this type of earnings momentum sustainable? Likely not, as oil has touched $145 recently before dropping to the current $115 range; but it is difficult to see the current share price as reflecting anything other than sector rotation due to the current sentiment (right or wrong). Traders seem to be betting that oil is sinking down to at least $90/barrel the way the oil sector is trading, however Petro Canada traders must be betting on a much lower price for oil for a long time. Either that or some very negative, company specific results.

It is hard to imagine that there would be much downside on this stock while it trades at these levels. In order for this price to truly reflect the company's mid term future I would imagine that their production would have to decline in tandem with oil declining in a big way. With this stock you get exposure to conventional oil, oil sands, refining, marketing, and natural gas.


Anonymous said...

OK, it is cheap, what is the dividend history and yield?

MG (moneygardener) said...

My kind of thinking... Check their investor relations website for div. history. The yield is currently 1.7%.

POL said...

Do you guys prefer Petro-Canada or Husky Energy and why?

MG (moneygardener) said...

I've made it known that I prefer Husky. There are several reasons why but the main one is the dividend policy. I am a dividend growth investor after all.

Anonymous said...

Petro-Canada is suffering from a short term problem at their Edmonton refinery. Many Petro-Canada gas stations have closed in Alberta because they have no gas to sell.

WKG said...

I have owned petrocan for quite some time, and am looking for an exit on it somewhere above 56cdn. If it ever hits that again, I will be out of it. The problem with the company that I see, as a long suffering shareholder, is the disfunctional management culture that us a remnant of the days when was a federal government entity, and it did not have to compete. Save yourself the aggravation of owning this dog . If you want to own a well run canadian integrated, buy husky or imperial. If you want to own a well run oil company with a tremendous growth profile, buy Suncor. I used to work for them, they know their buisness, and they know where their oil is coming from for the next fifty years. By the measurements that is used to gauge how cheap a company is, this is not a cheap company. When you consider that by 2012, their production of synthetic sweet crude is over double where it is now, it is cheap.
If you want the best in class Canadian E&P, Encana is the one.
I have been investing in Canadian oil & gas companies for over 15 years, and I have owned Ecana and Suncor for that period of time, adding more when I am able. Both these companies have in the past proven that they create shareholder value.
Petro Can is a dog, in my opinion

Anonymous said...

value trap

Anonymous said...

if you compare Petro Can to say Valero or Sunoco in the US its actually holding up well. Since its in refining its margins have been hurt by high oil and offset by its oilsands assets.

What % of revenue does PCA get from refining and natural gas relative to oil?