Five Canadian oil & gas stocks that slipped below our fair value estimates

WTI crude oil has fallen nearly 30% in value over the past six weeks, dragging down the share price of oil and gas companies.

Ruth Saldanha 14 November, 2018 | 6:00PM

Oil is rebounding today after a fall that wiped out around 28% of the value of West Texas Intermediate crude over the past six weeks. On Monday, WTI crude fell 8%.

Morningstar senior equity analyst Dave Meats said that the latest oil price declines came after OPEC reported overall production growth of 127 million barrels per day in October, noting that the supply shortage fears that drove up crude prices earlier this year now look overblown.

"In fact, key OPEC producers are now contemplating the need for further production cuts next year to avoid a glut forming instead," Meats said in an analyst note, cautioning that further volatility is likely, as OPEC's remaining spare capacity is unknown, and it's possible that steep declines are still on the way for Iran and Venezuela -- not to mention Angola, Libya and Nigeria.

With the volatility around oil prices, some oil and gas stocks have fallen below our fair value estimates. There are 12 stocks that are trading below our estimates, some at discounts of almost 50% to our fair value estimates.

Of these 12, we look at five that are in four-and five-star territory. The bigger the discount, the higher the star rating. Four- and 5-star ratings mean the stock is undervalued.

Name Industry Morningstar Rating Price/Fair Value
Enbridge Inc (ENB) Oil & Gas Midstream ***** 0.70
Cenovus Energy Inc (CVE) Oil & Gas Integrated **** 0.53
TransCanada Corp (TRP) Oil & Gas Midstream **** 0.71
Encana Corp (ECA) Oil & Gas E&P **** 0.71
Canadian Natural Resources (CNQ) Oil & Gas E&P **** 0.78
Data as of Nov. 14, 2018. Source: Morningstar

The only five-star rated stock is Enbridge, which also has a wide economic moat, an attractive dividend yield and a cheap valuation.

Currently, the cheapest of the stocks is four-star Cenovus Energy. As Morningstar senior equity analyst Joe Gemino says, "We expect Cenovus' solvent-aided process to drive meaningful value in the long term while improving the company's balance sheet. As such, we believe the stock is highly undervalued and presents an attractive opportunity for long-term investors."

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Canadian Natural Resources Ltd36.01 CAD-2.28
Cenovus Energy Inc13.23 CAD-1.71
Enbridge Inc46.73 CAD0.06
Encana Corp6.69 CAD-2.62
TC Energy Corp67.27 CAD0.55

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca