Which Canadian E&P's have the most leverage to higher commodity prices

The answers might surprise you

I maintain reasonably detailed financial models of the company’s I invest in and it is relatively easy for me to calculate how changes in commodity prices, costs, decline rates, capital expenditures, etc. affect value of the shares of each company. For the purposes of this article I have kept all assumptions constant except commodity prices and using a 4 X EBITDA multiple for enterprise value, then deducting debt and dividing by share count, I have calculated the impact of a $3 per BOE higher commodity price in 2024 expressed in terms of dollars per share higher value, and calculated the percentage gain if that valuation was reflected in trading prices with no change to the assumed 4 X multiple or any of the other inputs.

I limited the analysis to ten names I follow, for my own convenience.

If 2024 sees oil and liquids prices on average $3 per BOE higher and natural gas prices $0.50 per gigajoule (more or less the same as $3 per BOE for oil) the big winner (assuming the market values the shares based on cash flow multiples, a tenuous assumption to be sure) is Spartan Delta followed by Bonterra Energy, Obsidian Energy, Birchcliff Energy and Peyto Exploration & Development. Popular names like Rubellite, Advantage, Baytex, MEG and ARC benefit from higher commodity prices too, but display significantly less benefit using a percentage gain in value metric. The analysis ignores differing growth rates, differing capital allocation policies (dividends, buybacks, DCET or ARO outlays) and reserve life or land holdings, so it is a pretty weak analysis compared to a full-blown valuation.

It is nonetheless useful. While I hold all these names other than Advantage, MEG and ARC, my largest holdings comprise the top six names. My Baytex holding is entirely call options at a CAD$5.00 per share strike prices and a duration that ends in January 2026. That holding is a speculation that Baytex will pay down debt reasonably over the duration of the option and modestly increase production in parallel, which should be enough to make the option bet worth the candle.

I don’t hold Advantage since I have long since concluded that CO2 has no effect on climate ¹ and the Entropy operation may become a stranded asset, and I have avoided MEG and ARX despite their excellent assets owing to concerns about the quality of their financial management. My concerns, not necessarily yours.

1. This 2022 article nails it. World Atmospheric CO₂, Its ¹⁴C Specific Activity, Non-fossil Component, Anthropogenic Fossil Component, and Emissions (1750–2018)