3 Small Cap Canadian Energy Stocks That Could Thrive As the Oil Price Slides

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Oil stock investing, in many ways, seems like a slippery slope these days. Specifically, many good energy names are being dragged down by the recent fall in the price of oil. That being said we have identified three Canadian stocks that stand out due to fact each one has a Return on Equity of greater than 15% as well as interest coverage ratios that appear sufficient enough to service its debt from its operating income.

Raging River Exploration Inc. (TSX: RRX): This junior oil and gas producer focused in the Kindersley area of Saskatchewan has seen its share price slide from north of $11 in late August 2014, to as low as $7 before recovering somewhat to its current price of $8.

The company currently controls 260 net sections of Viking light oil lands in Saskatchewan and its cash flow has increased steadily from $7.5 million in Q2 2012 to approximately $58 million during its most recently reported quarter. Raging River also claims it is able to generate free cash flow even with the oil price as low as US$70 a barrel. 

ROE for the company is expected to be 25.5% in 2014 and its interest coverage ratio is estimated at 57.2 times. During its most-recent quarter (Q3 2014), Raging River reported record average production of 10,679 boe/d (95% oil), an increase of 88% over the comparable period in 2013. The company also increased its 2014 production guidance to 12,750 boe/d from 12,500 boe/d.

Freehold Royalties Ltd. (TSX: FRU):The company owns royalties on 30,000 oil and gas wells in British Columbia, Alberta, Saskatchewan, Manitoba, and Ontario. Its stock, meanwhile, currently has a dividend yield of 7.6%.

ROE for the company is expected to be 20.1% in 2014 and its interest coverage ratio is estimated at 31.5 times. Freehold Royalties recently reported Q2 2014 cash flow of $37.3 million, up 22% from the same period last year and said it expects to exit 2014 with debt below 0.9x debt/cash flow. The company also increased its 2014 production forecast to 9,500 boe/d from 9,100 boe/d.

Parex Resources Inc. (TSXV: PXT): Parex is focused on Colombian oil exploration and production. The company recently reported that its third-quarter cash flow increased to $88.7 million from $77.3 million.

ROE for Parex is expected to be 15.0% in 2014 and its interest coverage ratio is estimated at 14.9 times. For 2015, the company expects a 30% year-over-year increase in average production to between 28,500 and 30,000 barrels of oil per day. Parex has no net debt and, thus, is well positioned to target additional growth opportunities.

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