Petro-Canada $51 - Toronto symbol PCA

PETRO-CANADA $51 (Toronto symbol PCA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 495.8 million; Market cap: $25.3 billion; SI Rating: Average) is Canada’s secondlargest integrated oil company after Imperial Oil. The company operates several properties in Western Canada as well as offshore platforms near Newfoundland. It also operates refineries and over 1,300 retail gas stations. Canada accounts for roughly 90% of Petro-Canada’s revenue. Internationally, the company owns or participates in projects in the North Sea, Libya, and Trinidad and Tobago. In the three months ended March 31, 2007, Petro-Canada earned $1.17 a share before unusual items, up 23.2% from $0.95 a year earlier. Strong gains by its retail and refining operations, partly due to the fire at Imperial’s refinery in Ontario, helped offset lower oil and natural gas prices. Cash flow per share rose 40.7%, to $2.35 from $1.67, while revenue grew 14.3%, to $4.8 billion from $4.2 billion. Like most energy producers, Petro-Canada is using its strong cash flow to find new reserves that will generate strong profits for years. Right now, 30% of its production comes from long-life assets. The company aims to increase this to over 50% in the next few years. A big part of Petro-Canada’s strategy is developing its oil sands reserves in northern Alberta. The company owns 12% of Syncrude, and 100% of the MacKay River project. It also owns 55% of the proposed Fort Hill oil sands project, whose reserves should last between 30 and 40 years. Commercial production at Fort Hill should begin in 2011. The company also has high hopes for its operations in Libya, which has huge oil and gas reserves. Operating in politically unstable areas like the Middle East adds to Petro-Canada’s risk. But Petro-Canada conducts most of its business in Libya through joint ventures with the government-owned oil company, which helps cut this risk. The company will probably spend about $9.20 a share on exploration and development in 2007, up 35% from 2006. That’s slightly more than Petro- Canada’s projected cash flow of $9.00 a share. But long-term debt is a low 25% of shareholders’ equity, so it could comfortably afford to borrow more. It also had $1.63 a share in cash at March 31, 2007. Petro-Canada should earn $5.03 a share in 2007, and the stock trades at just 10.1 times that figure, which is less than the p/e’s for Imperial Oil or EnCana. That’s because Ottawa has capped the amount a single shareholder can own, as well as limits on foreign investors, which makes a takeover nearly impossible. The $0.52 dividend yields 1.0%. Petro-Canada is a buy.