Investors are shunning Canadian energy stocks in the face of a rebound in oil prices that promises to deliver strong earnings from companies hardened by a rough 2018, according to money managers following the battered sector.
Western Canadian Select recently crested above US$55 per barrel after trading for just $10.29 in late November. The discount to West Texas Intermediate has narrowed dramatically as the U.S. benchmark climbs towards $65.
Most Canadian energy stocks have rallied as a result. The iShares S&P/TSX Capped Energy Index ETF (XEG.TO) has climbed more than 27 per cent since a recent low on Christmas Eve. Suncor Energy Inc. (SU.TO), Encana Corp. (ECA.TO) and Enbridge Inc. (ENB.TO) have gained between 17 and 25 per cent year-to-date.
The strong performance has not resonated with investors.
“One oil executive told me, ‘We're the new tobacco. Nobody wants to touch us. Everybody thinks our product is toxic,’” Ryan Bushell, president of Newhaven Asset Management, told Yahoo Canada Finance. “The sentiment is terrible.”
Greg Taylor, chief investment officer at Purpose Investments, said enthusiasm around Canada’s energy sector is about as low as it’s ever been.
“People have just hated the sector for so long that they have taken it off their screens,” he said. “It just feels like investors are exiting the space.”
Perennial problems persist. Like the lack of takeaway capacity in Western Canada.
Crude-by-rail shipments staged a minor recovery in March, according to Genscape. However, the U.S. company found the amount of oil in storage is comparable to December, when the Alberta government announced its production cut.
That said, Taylor sees a lot of the “big negatives” in Canada dissipating, and expects strong results in the coming quarters. He’s watching Cenovus Energy Inc. (CVE.TO) and Whitecap Resources Inc. (WCP.TO).
Bushell said Canadian Natural Resources Ltd. (CNQ.TO), as well as smaller players such as MEG Energy Corp. (MEG.TO), Baytex Energy Corp. (BTE.TO), and Crescent Point Energy Corp. (CPG.TO), have significant room to run.
“I think there are huge gains to be had. But the sentiment is so poor, especially for the Canadian-listed mid-cap stocks, that it’s hard to tell if that will happen or not,” he said.
“Crescent Point is less than half of where is bottomed in 2016. The assets haven’t changed. A lot of their production is U.S.-based, so it’s not subject to pipeline egress issues. That company should be somewhere near double where it is today.”
Bushell owns large positions in Enbridge, TransCanada Corp. (TRP.TO), and Pembina Pipeline Corp., (PPL.TO) based on the companies existing infrastructure. He said a new pipeline project would be a gamechanger, but pegs the odds of a greenlight at less than 50 per cent at this point.
Taylor said any sliver of good news for the energy patch will be a powerful catalyst to move the sector in-line with improving oil prices.
“People just need to see some light at the end of the tunnel. The doom and gloom just became so much that it felt like there was nothing going right for the group for so long,” he said, emphasizing that earnings have remained strong.
“This isn’t an earnings recession. It’s a multiple contraction. What people are willing to pay for long-term growth. If people can start feeling that we have hit the point of maximum pain, that can go a long way to expand the multiples.”
Both agree that Canadian energy players who have proved resilient through the worst of 2018 will soon be a bright spot for investors as commodity strength and cost cutting flow through to balance sheets.
They say it’s a matter of refocusing the market’s attention.
“The next round of earnings for Canadian companies is going to look fantastic,” Bushell said. “It’s been a long time in the wilderness, but I think investors will find it hard to ignore if companies are able to put up six months or a year of cash-flows without the volatility.”
Reflecting on the oil executive, whom he declined to name, comparing the industry’s reputation to big tobacco, Bushell said it speaks to a sense of hypocrisy around investment in fossil fuels today.
“I think the sentiment over the last five years has really shifted. To be viewed as an industry that is killing people when everybody likes to fly around the world and go on trips and cruises,” he said.
“I tend to look at things from the point of view of what does humanity need, not what does it want, and try to invest in things that we absolutely need. I think this is one of them.”