PETRO-CANADA $49 (Toronto symbol PCA; SI Rating: Average) is Canada’s second-largest oil company, with major production areas in Western Canada and off the coast of Newfoundland. It also sells gasoline through over 1,400 retail stations.
In the third quarter of 2005, the company’s production fell 3% from a year earlier due to shutdowns for maintenance and lower output at it older properties. However, higher oil prices offset the lower production.
Petro-Canada should start to realize the benefits of several major projects in the next few years. Production should rise between 4% and 7% by 2008 thanks to higher production at Syncrude (Petro- Canada has a 12% interest) and the start-up of the new White Rose offshore oil platform near Newfoundland.
The company aims to triple its oil sands production in the next decade. Most of that will come from its proposed Fort Hills oil sands project in Northern Alberta. Petro-Canada owns 55% of Fort Hills, and will make a final decision to go ahead with the project in 2006.
Petro-Canada aims to offset the costs of these projects by selling non-core assets. It just agreed to sell its oil and gas investments in Syria for $676 million; it earned $659 million or $1.27 a share before unusual items in the third quarter of 2005. Getting out of politically unstable countries like Syria also cuts Petro-Canada’s risk.
The stock now trades at 10.9 times the $4.50 a share it probably earned in 2005, and 6.4 times its likely 2005 cash flow of $7.64 a share. The $0.40 dividend yields 0.8%.
Petro-Canada is a buy.
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