MENU

Should Low-Risk Investors Buy or Avoid This Canadian Oil Stock?

A Calgary-based crude oil and natural gas producer focused on Western Canada, TORC Oil & Gas (TSX:TOG) is looking like good value for money at the moment, with some growth ahead in terms of expected annual earnings. Let’s take a look at how its stats are shaping up and decide whether it’s a buy for passive-income investors.

Is this a top stock to watch?

The majority of top Canadian oil and gas stocks tend to have several factors in common: they pay a stable dividend, usually higher than the bottom 25% of yields on the TSX index, have slightly too-high P/E ratios offset by lower P/B ratios, and generally have some growth ahead. So, how does TORC Oil & Gas compare?

For investors who like to go by price-to-earnings ratios, TORC Oil & Gas’s P/E of 54.2 times earnings may look too high. However, the stock is undervalued in terms of two other metrics. First of all, its P/B ratio, which, at 0.6 times book, is below the market as well as the average Canadian oil and gas stock’s P/B of 0.9 times book. Second, the stock is discounted by more than 50% of the future cash flow value, making for intrinsically good value for money.

A dividend yield of 5.93% should be enough to add this stock to a passive-income investor’s wish list. However, there are some mixed signals in the rest of the data. For instance, on the cons side, a PEG of 2.6 times growth indicates overvaluation, while a past-year ROE of just 1% indicates a poor-quality stock. However, a decent balance sheet (TORC Oil & Gas carries debt 22.4% of net worth, and it’s well covered) and significant expected growth (see a projected 20.8% annual rise in earnings) go some way to balance these factors.

Is this stock suitable for a low-risk investor?

Having gained 3.6% for the day but shed 5.73% overall in the last five days at the time of writing, TORC Oil & Gas is a roller coaster of a stock at the moment. Indeed, its beta of 1.36 relative to the Canadian oil and gas industry indicates moderate volatility, meaning that the general passive-income energy investor with little appetite for risk may want to look elsewhere.

Down 3.3% over the last five days, Pembina Pipeline (TSX:PPL)(NYSE:PBA) is another stock to consider buying on the dip and could be stacked alongside TORC Oil & Gas due to some diversification its infrastructure-based arena of operations, depending on just how bullish one is on the Canadian oil industry at present. Alternatively, an energy stock with a broader mix of sources, such as a combination of natural gas and renewable sources, may be an appropriate pairing.

The bottom line

The casual passive-income investor looking to make money with dividend stocks may want to stick to the big players, especially if long-term security of payments is an issue. However, as an oil-weighted investment, TORC Oil & Gas would suit buyers bullish on the “black gold,” while for the moderate risk-averse energy investor, it could be an appropriate investment due to a canny acquisition style and clean balance sheet.

Our #1 Stock to Buy in 2019 (and Beyond!)

When you buy heavily cyclical stocks at low prices… and then hold the shares until the cycle reaches its peak… you can make a very healthy profit.

Every investor knows that. But many struggle to identify the best opportunities.

Except The Motley Fool may have a plan to solve that problem! Our in-house analyst team has poured thousands of hours into their proprietary research – and this is the result.

Our top advisor Iain Butler has just identified his #1 stock to buy in 2019 (and beyond).

Click here to claim Iain’s new report, absolutely FREE!

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. Pembina is a recommendation of Dividend Investor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.