Bullish on Crude Recovering? Then Don’t Invest in Oil Companies

Why WestJet Airlines Ltd. (TSX:WJA) and Boardwalk REIT (TSX:BEI.UN) are better bets on the recovery of crude than any oil producer.

| More on:
The Motley Fool

We all know investors who are guilty of overcomplicating the practice.

I’ve always looked at investing ideas like this: if the investing thesis isn’t obvious after only a little research, it’s probably not worth pursuing. Most investors aren’t smart enough to gain a whole lot of wisdom from obscure ratios and the footnotes of financial statements. This is why Warren Buffett encourages investors to look for moats. A moat is much easier to identify than trying to value a hidden subsidiary.

But at the same time, there’s at least one sector where I’m convinced the obvious play isn’t the right one. Many investors have collectively put billions of dollars to work in oil companies, convinced the bargain prices of these producers will be nothing but a memory when crude inevitably recovers.

Those investors are onto something. There are dozens of Canadian oil producers who, at this point, are nothing but levered plays on crude oil. If crude pops 5%, they’ll be up 10%.

But at the same time, many of those companies are in dire financial straits. They’re wallowing in debt. With debt payments looming and crude so low, they can’t afford to invest much of anything towards expansion, which means production will slowly go down. This exacerbates an already big problem.

If crude stays at $30 per barrel over the majority of 2016, many oil producers will file for bankruptcy protection. We’re already seeing this trend start with some U.S.-based operators. Since nobody knows when the price of crude will recover, I think this method is ultimately a bad way for investors to play a recovery in crude.

There’s a better way. Investors should focus their attention on solid Alberta-based companies that are still profitable even during these tough times. These companies have virtually no chance of bankruptcy–unlike levered oil producers–and most even pay dividends. Yes, weakness in the energy sector is hurting them, but not nearly as bad as oil producers.

Which companies?

One such company is WestJet Airlines Ltd. (TSX:WJA), which has grown from tiny roots to become Canada’s second-largest airline.

Most airlines love a decline in oil, but for WestJet, it’s a double-edged sword. The company enjoys lower fuel costs, but since it dominates routes in western Canada that are dependent on the oil sector for business travel, planes are emptier.

Still, there’s plenty of evidence that WestJet has positioned itself well for even a prolonged downturn. It has done a nice job growing high-margin revenue from sources like charging for bags and introducing WiFi on flights. It has more than $1.2 billion worth of cash on its balance sheet. And after making $2.91 per share in a difficult 2015, things have to get really bad this year for the company to not be profitable.

Plus, investors are getting an attractive 3.7% dividend to wait. That’s many multiples better than most fixed-income yields these days, and WestJet comes with considerable upside potential.

Another great company that’s temporarily beaten up is Boardwalk REIT (TSX:BEI.UN), one of Canada’s largest owners of apartments. The company owns more than 30,000 apartments across Canada with approximately 60% of units located in Alberta.

As goes oil, so will go Calgary’s rental market. Friends who live in the city are telling me stories about how landlords everywhere are dropping rents to entice tenants to stick around. It’s obvious this trend will hurt Boardwalk.

But at the same time, it’ll take more than just that to fatally injure Boardwalk. The company has a great balance sheet with a debt-to-assets ratio of just 38% as of September 30. It also has a payout ratio of just 67% of adjusted funds from operations, which is one of the lowest in the whole sector. This means the 4.8% dividend is in pretty good shape.

Just a few years ago Boardwalk traded at $70 per share. Perhaps that’s aggressive, but book value is $61.59 per share. If Boardwalk shares only recover to the value of the company’s underlying assets, investors are looking at a return of approximately 50%, plus a generous dividend.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Dividend Stocks

thinking
Dividend Stocks

Should You Buy BCE Stock for its 8.6% Dividend Yield?

Down over 20% from all-time highs, BCE stock offers you a tasty dividend yield in 2024. But is the TSX…

Read more »

grow dividends
Dividend Stocks

How Long Would It Take to Turn $20,000 Into $100,000 With TSX Dividend Stocks?

Here's how high-quality TSX dividend stocks and the power of compound interest can help grow your investments by 400% or…

Read more »

Paper airplanes flying on blue sky with form of growing graph
Dividend Stocks

2 Soaring Stocks I’d Buy Now With No Hesitation

These two stocks may be the most expensive on the market, but they're high for a reason! And I'm still…

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

Invest $374.50 Each Month to Create Passive Income of $288 in 2024

Investing a specific amount each month to create passive income this year is possible with monthly dividend payers.

Read more »

Happy retirement
Dividend Stocks

2 Stocks to Help Turn $100,000 Into $1 Million

If you want to reach $1 million, $100,000 can certainly get you there. Even if you invest in some low…

Read more »

warning or alert
Dividend Stocks

Income Alert: These Stocks Just Raised Their Dividends

There's no shortage of companies that raised their dividends recently. Here's a trio of options to consider buying now.

Read more »

Business success with growing, rising charts and businessman in background
Dividend Stocks

Don’t Look Now, But These 3 TSX Stocks Look Poised for a Nice Rally 

Three TSX stocks are in a downtrend amid headwinds. 2024 may be rocky for them, but they are poised for…

Read more »

protect, safe, trust
Dividend Stocks

3 Safe Dividend Stocks to Beat Inflation

These three dividend stocks are excellent buys to beat inflation, given their solid underlying businesses and high yields.

Read more »