It has been a gruelling practice to be an oil investor over the past several years. It feels like you are constantly having your head handed to you. The government is against you, the oil market is grim, and the world economy seems to be perpetually in a state of disrepair. In spite of all the negativity, the value-oriented contrarian in my soul continues to be drawn to the sector.
Deals are not found when everyone is looking for the same thing. They are found in the discount bins of the world, and there is nothing more in the bargain basement than Canadian junior oil stocks. There are a number of dogs in the space, to be certain, but there are some gems that might pay off substantially if you are willing to hold your nose and start picking away.
The past is in the past, as a famous cartoon character once said, and we need to look towards the future. Oil companies are now in much better shape than they were a few years ago. They are reducing debt, buying back shares, and increasing cash flows at a good rate.
The oil companies today are in much better shape than they were a few years ago. Now is the time to buy these stocks. When the next upturn comes, these companies will be well positioned to capitalize. Take Whitecap Resources (TSX:WCP), for example. The stock has been beaten down massively, along with the rest of the junior oil companies.
The insiders now seem to think that the sector is finally turning around, though. They are taking advantage of these reduced prices to buy shares in the company at a pretty good rate.
At these levels, Whitecap makes a pretty compelling buy for an income stock as well. Its debt is getting lower all the time, having fallen from $1.29 million in September 2018 to $1.24 million today. Furthermore, $795 million of that long-term debt is locked in at an average rate of 3.5%.
Whitecap’s owners seem to be willing to buy into the company at a pretty substantial rate, which makes me start to think that there could be some value in the company. It might be a while, and there might be rough times ahead even yet, but you have to consider how quickly capital can be returned to you while you wait.
The better-than-9% dividend yield still appears to be sustainable in spite of the 25% reduction in revenues year over year. The company believes that its prudent capital-expenditure policy and strong balance sheet should support the payout, which currently sits at 83% of funds flows.
Just consider that for a moment. While I would never consider the dividend of any commodity stock entirely safe, the management has gotten this company in such great shape that it is pretty confident it can support, or maybe even increase, its dividend for the foreseeable future.
This is a unique time in the Canadian oil patch experience. Whitecap’s shares are cheap because people aren’t willing to stick their necks out to buy shares, not because the company itself is in trouble. The entire oil patch is in a similar boat, with many great companies sporting massive yields simply because no one is buying.
No one, that is, but the insiders and brave investors are willing to get in when the stocks are cheap. With Whitecap, you have an excellent opportunity to double your money. A double would only mean a return to where it was trading one year ago, which was already pretty cheap. Buy these shares now, before the big investors start to get in.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
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 Kris Knutson owns shares of WHITECAP RESOURCES INC.