The Recent Pullback in Oil Is Good News for Computer Modelling Group Ltd.

Computer Modelling Group Ltd. (TSX:CMG) could be the top beneficiary of a recovering energy market. The recent oil price correction may suggest a good buying opportunity.

| More on:

The dust appears to be settling following a volatile two years in oil prices. Management throughout the industry seem to be breathing a bit easier (although cautiously) based on sentiment in recent management discussion and analysis reports. Selling, general, and administrative costs have shown an uptick among several energy firms—an indication of industry confidence (with perhaps a hint of greed). Yet with the energy sector in the tail end of recovery mode, can savvy investors still find an opportunity?

The most vulnerable during the oil crisis were the oil and gas equipment providers. On the periphery, these services were typically cut as clients struggled to survive. The result, for those fortunate enough to stay in business, was typically a staff reduction and desperate financing measures (high-interest debt or additional public offerings). Myopic as it was, these firms simply could not afford to plan for future growth.

Computer Modelling Group Ltd. (TSX:CMG), a software company focused on oil-reservoir simulation, followed a different path. Although exposed to the same risks, Computer Modelling did not require drastic changes to the balance sheet. Furthermore, while other providers were cutting dividends, Computer Modelling consistently raised its distributions. One can argue that a software company should not be compared to, say, Canyon Services Group Inc. (TSX:FRC), a provider of stimulation and fluid management services. However, when two companies are competing over the same waning budget, I’d suggest the contrary.

The long-term prospects of Computer Modelling appear to be sound. The greatest risk to the business would be customers bringing a similar technology in house. This seems unlikely given the company’s commitment to cutting-edge software, as evidenced by its 20% R&D budget. In fact, while other companies were slashing R&D (including customers), Computer Modelling has grown its department year over year.

With the oil prices always an unknown, Computer Modelling is not impervious to risk. That said, should energy companies begin to open their wallet once again, Computer Modelling could stand to be a top beneficiary. An increase in global revenue from rising oil and gas spending would directly impact the bottom line, unlike other providers who face large interest payments. Should the price of oil lose its lustre, Computer Modelling has longer-term contracts to support much of its capital expenditures.

Valuation must always be the final checkmark. Trading at 33 times trailing 12-month earnings, Computer Modelling is no bargain relative to other software companies. That said, in comparison to other oil and gas equipment stocks, it looks to be a good value. The 4% current dividend yield signals a mature market; this company should not be selected for a growth portfolio. However, for speculators in the energy space, this unique angle could provide a strong upside should oil decide to rally.

For the savvy investor with a longer-term horizon and income in mind, the recent pullback in crude may support a good entry point for this oil and gas tech stock.

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 Jared Shulman has no position in any stocks mentioned. The Motley Fool owns shares of COMPUTER MODELLING GROUP LTD. Computer Modelling Group is a recommendation of Stock Advisor Canada.

More on Energy Stocks

exchange traded funds
Energy Stocks

3 Sector-Specific ETFs to Consider

Exposure to a specific sector doesn’t make sense from a diversification perspective, but it is often a good way to …

Read more »

grow dividends
Energy Stocks

1 Small-Cap Energy Stock Could Raise Dividends 6 Times by 2023

The Omicron variant is a threat, but should not cause a significant erosion in oil demand say energy bulls. Rafi …

Read more »

green power renewable energy
Energy Stocks

Are These 2 Undervalued Green Energy Stocks the Best to Buy Now?

As most investors know, this market environment, with stocks selling off significantly, is the best time to buy high-quality companies …

Read more »

oil and gas pipeline
Energy Stocks

Why Obsidian Energy Stock Is up Over 17% This Week

What happened? While tech stocks have continued to teeter lately, energy names have been unstoppable. The small-cap names among them …

Read more »

Oil pumps against sunset
Energy Stocks

Oil Bull Market: 3 Top ETFs to Buy Today

Oil prices continued to gain momentum in early afternoon trading on January 26. The price of WTI crude was up …

Read more »

warning or alert
Energy Stocks

Alert: Bank of Canada Didn’t Raised Interest Rates!

The Bank of Canada has decided not to raise interest rates after today’s policy meeting. That means the Bank of …

Read more »

oil and gas pipeline
Energy Stocks

Enbridge: 7% Yield AND Dividend Growth in One Package!

Enbridge (TSX:ENB)(NYSE:ENB) is the rare dividend stock that “has it all.” A 7% yielder that also has a very high …

Read more »

money cash dividends
Energy Stocks

4 Top Dividend Stocks to Buy Under $30

With the U.S. Federal Reserve signalling to raise its policy interest rate from March, the volatility in the global equity …

Read more »