Energy Prospectus

Out of the eighty-four companies that I track for my oil and gas ranking, the majority (54) are American companies and a minority (30) are Canadian. The top 25 however is denominated by Canadian companies. The top 25 consists of seventeen Canadian companies and only eight American companies. The reasons why Canadian companies rank so well is that on average Canadian companies outperform their American counterparts in all of the categories that influence the ranking.

1. Proven reserves
Proven reserves and reserves replacement are important parameters for ranking as they impact the future production levels (increases and/or decline rates) and thus profits and shareholder returns. Proven reserves can be normalized by dividing reserves by the 2025 production. This yields an equivalent number of years of production. Late 2024 Canadian companies hold far more reserves than their American counterparts:
• Oil companies - Canada 12.7 years vs USA 8.7 years – difference 45%.
• Gas companies – Canada 14.4 years vs USA 10.0 years - difference 44%.

The reduction for American oil companies from 11.5 years (2020) to 8.7 years (2024) is caused by the combination of increasing production and decreasing reserves.

2. Reserves replacement
Reserves replacement ratio (RRR) is defined as autonomous bookings/annual production. A RRR >1.0 indicates that that reserves produced in a year are fully replaced by new volumes:

• RRR period 2019-2024 - Canada 1.44 vs USA 0.90

The RRR of Canadian companies is far higher than their American counterparts. American companies did not replace the volumes produced over the last six years. Canadian companies grew reserves.

3. Production
High reserves and high RRR feed into production growth. As to be expected, the production growth of American companies between 2025 and 2029 is far lower than that of Canadian companies. American companies production hardly grows after 2025, while Canadian production keeps on growing (4-5%/year).

The 12% production growth in 2025 can be ignored as this is the consequence of mergers completed in 2024/2025.

4. Balance sheet
The balance sheet late 2024 of Canadian firms on average is far stronger than that of their American counter parts. The health of the balance sheet can be expressed in ()1 the equity ratio (=equity/balance sheet total, high is good) and (2) the debt/EBITDA ratio (low is good):

• Equity ratio - Canada 60% vs - USA 53%.
• Debt/EBITDA ratio - Canada 0.85 vs USA – 1.38

The balance sheet of Canadian companies on average is healthier than that of their American counter parts.

5. Profitability and shareholder return
Profitability and shareholder returns are closely linked. Profitability can be expressed as the Price Earnings ratio (=share price/eps) or PE. Shareholder returns are the sum of dividend and share buybacks. The PE of Canadian companies in 2024 (8.2) is 25% lower than that of American companies (10.6). The PE of Canadian companies after 2025 becomes even better with an increasing production, while the PE of American companies deteriorates and increases.

Shareholder returns from Canadian companies are higher than those of their American counterparts and will keep on increasing over time. The shareholder returns from American companies do not reach the same levels and start to decline after 2027.

6. Conclusions
Canadian companies on average score far better than their American counterparts on all parameters under consideration. As such it is worthwhile to consider not only USA companies but also Canadian companies when you want to invest in oil and gas.
Note that there are significant differences between country average and individual companies

If you want to know on a weekly basis which USA and Canadian companies rank well, then send an E-mail to Dan Steffens dmsteffens@comcast.net. For $ 250/year you will get a weekly update as well as a report with the analysis of quarterly/annual results and other events.

Great post. I agree there are plenty of good Canadian companies on sale. With a long view, the tariff fear/political uncertainty will pass. I believe Canada like the US is motivated in buildout of takeaway infrastructure. Lot’s of these companies are buying back their cheap stocks while they are on sale and the buildout ultimately comes to fruition.

Query: As I understand it what goes into proved reserves are identifiable reserves that are planned for development within a certain period which I believe is 5 years. I may be wrong and Canada may have different rules

At any rate, wouldn’t the fact that many companies have slowed growth towards maintenance reflect a lot of actual reserves (future running room) that would be “off the books” as a result.

Examples would include companies such as Range Resources in US and Meg Energy in Canada that have significant unbooked future reserves (like 40 years).

Yes, 3rd party audited reserve reports for American companies are very conservative because they are based on SEC commodity pricing rules.

Canadian companies use forward looking commodity prices, which are also conservative based on the average oil & gas prices of three engineering companies.

In my opinion, PV10 Net Asset Value based only on Proved Reserves is a very conservative price target for any profitable upstream company. Most of the Canadian companies that I follow are trading today at the discount to PV10 NAV base only on 1P reserves. The last time I looked, HME and IPO were trading at less that PV10 based only on Proved Developed Producing reserves. That is insane because it assumes none of the company's other proved reserves will be developed. Even if that is true, proved drilling locations still have significant market value.

This is why so many upstream companies are aggressively buying back their stock.

I just finished updating my forecast model for Vital Energy (VTLE) which is currently trading at less than 50% of PV10 NAV based only on 1P reserves and it is trading at less than 1X TipRanks' consensus 2025 operating cash flow per share. I just posted the updated forecast to the EPG website.

Vital has 925 HZ development drilling locations in the Permian Basin that probably have a combined current value over $1 billion, which is not reflected in the share price.

This sector trades in cycles. FEAR of the tariffs and FEAR of "Drill Baby Drill" will eventually fade. The global oil market and the North American natural gas markets are much tighter than most people realize.

Chuck, you are correct.

There are SEC rules such as the 5-year rule which state if there are no drilling plans for reserves within 5-years, then such reserves are moved back from proven into probable or possible.
There are other differences such as on price as Dan has highlighted. Canadian rules for what constitute condensate and what is NGL are also different from the SEC rules.

I am not that bothered if companies underreport their reserves after they slow down things. I add a margin for probable reserves on top of the proven reserves to calculate the future production profiles.

For Canadian companies the probable reserves are easy. Canadian rules require publication of probable reserves. For American companies I make an estimate of probable reserves based on the RRR, sometimes with some adaptation if I know something specific about the assets.

In the ranking I use discount factors of 12-18%. As such production beyond 2025-2038 really does not matter that much. Errors are discounted away.

Also, I have learned over the years that consistency is more important as correctness. I do the same for all companies and as such I make the same error for all of them.

Also, keep in mind that "probable" reserves in the shale plays are really proved reserves because in all of the oil & gas basins they now know where all of the Tier One and Tier Two areas are located. Since they have thousands (maybe millions) of vertical well logs that have penetrated the tight zones.

Without the 5-year rule, most companies would be reporting a lot more "proved" reserves.

One factor affecting the value, in US dollars, of Canadian producers, is the CDN$ - US$ exchange rate. Look at a 5 year chart. It recently hit a low of about .68, with highs having been around .80 in 2022 and higher before that. One hopes that with time, the Cdn dollar will strengthen again so that the price in US dollars of Canadian companies will improve. https://wise.com/us/currency-converter/cad-to-usd-rate. One more reason, in addition to those discussed here, to own Canadian companies.

Great point. You can’t argue with the massive long lived low decline resources in the ground in Western Canada. My view is that by the end of Trump’s term the political landscape will improve and the Canadian dollar to US dollar will move back towards parity. Canadians will hopefully stop hating US and with an energy friendly government the value of energy companies will be realized.In the meantime I’m buying/adding.

About 70% of our energy sector investments are Canadian Juniors for (a) high yield dividends and (b) because I believe they all have 50% to 100% upside. Hemisphere Energy (HME.V and HMENF) is our largest holding.

Pristine Balance Sheet, generating lots of free cash flow, and significant upside: If Hemisphere's Marsden pilot project is successful, the share price should be a triple from where it trades today. You should all take the time to review their March slide deck. Another "Special Dividend" should be coming soon.

HME.V closed at $1.82Cdn on March 28. First Call's price target is $2.72Cdn.
> I expect Hemisphere to pay at least two special dividends in 2025, so total cash dividends should be at least $0.16Cdn/share for annualized yield of 8.8% based on the current share price.
> Per the December 31, 2024 3rd party reserve report (conservative IMO), the PV10 Net Asset Value is $317Cdn Million, $3.21 per Fully Diluted Share
> Hemisphere's current quarterly production is trending at 3,800 boe/d (99% heavy oil and based on field estimates between January 1 - March 15, 2025). < The 2025 capital program will complete development of the two polymer floods within Atlee Buffalo and should increase production to 4,200 Boe per day by December 2025.
> Marsden: The Company's new Saskatchewan lands currently account for only 3% of 1P and 6% of 2P reserves, while making up only 3% of 1P and 5% of 2P NPV10 BT valuations of Hemisphere's reserves. Significant potential reserve upside remains on Hemisphere lands if the play proves successful over the course of 2025 and beyond.

Read more here: https://www.hemisphereenergy.ca/news/wed-03192025-1200-hemisphere-energy-announces-proved-reserves-317-million-proved-net-asset

My Updated forecast/valuation model has been posted to the EPG website.
If the Marsden pilot is successful, my 2025 forecast will be increased.

My updated current valuation is $4.00Cdn