As cannabis dips, now may be time to look at Canada's beleaguered oil patch

Crude oil just had its worst month in two years (Yahoo Finance)
Crude oil just had its worst month in two years (Yahoo Finance)

As pot stocks go up in smoke, Canada’s cannabis sector has been grabbing most of the headlines these days. But investors might want to pay closer attention to the oil patch. There are 74 companies to choose from in the TSX and energy makes up 18.5 per cent of the index.

“There are lots of potential bargains out there, especially in the drilling sector, but one has to be careful to avoid the ones that will either wither away or go bankrupt,” Benj Gallander, president of Contra The Heard Investment Letter, told Yahoo Finance Canada.

Gallander says he owns Obsidian (OBE.TO) and Pengrowth (PGF.TO) and neither is for the faint of heart.

Canada’s biggest producers reported earnings today. Canadian Natural Resources (CNQ.TO) and Suncor’s (SU.TO) profit rose on higher oil prices and increased production.

“Suncor is obviously more stable than the ones I mentioned, but far less upside. Also pays a sweet dividend. Nicely profitable with growing revenues. Big debt load though,” says Gallander. “Canadian Natural Resources is a bit iffier. Again a big debt load. Normally profitable. Another good dividend.”

Gallander does not own either and says he would avoid Encana (ECA.TO), despite today’s earnings beat. Encana also announced it agreed to buy U.S. shale producer Newfield for $5.5 billion, in its biggest deal ever. Encana’s stock price tumbled on the news.

Encana shares took a dive after news of their $5.5B purchase of U.S.-based Newfield (Yahoo Finance Canada)
Encana shares took a dive after news of their $5.5B purchase of U.S.-based Newfield (Yahoo Finance Canada)

Slippery path ahead for the oil patch

Despite fatter bottom lines, the sector isn’t out of the woods yet. Some are even spouting doom and gloom.

“The biggest hurdle continues to be trying to find an outlet for exporting its crude oil,” Carl Larry, Markets Specialist at Refinitive, told Yahoo Finance Canada. “With the U.S. exporting crude out in droves, like the Greek armada in Troy and the cheapness of the U.S. WTI, it’s hard for Canada to move oil out.

Canada’s landlocked oil resources have helped push the gap between Canadian oil and West Texas Intermediate to record highs.

Larry sees challenges ahead for Canadian Natural Resources and Suncor, but doesn’t think it’s all bad news.

“I think that CNQ’s production diversity might give it a little more room to grow if we see oil prices rebound into November,” says Larry. “Suncor might be able to make good on their refinery production.”

Larry says investment in the oil sector is limited right now.

“We’re going to need to see some correction in the next week or two before we’re going to build any confidence in what lies ahead in oil and the respective stocks in this industry,” says Larry.

Larry thinks Encana bought Newfield because it finally ran out of patience. The company basically decided that since it can’t beat the U.S. shale players, it will join them instead.

“Waiting for a pipeline with access to Canadian export terminals can’t come soon enough and this might be the best way to get better at what they do best,” says Larry.

Download the Yahoo Finance app, available for Apple and Android.