Investors staying away from energy stocks despite Canadian oil’s huge rally

A massive 87 per cent rally in Canadian crude oil prices since the end of 2018 has not been enough to convince skeptical investors to re-enter the challenging energy sector, leaving a few stocks trading below liquidation values.

Investors have traditionally used a rise in Western Canadian Select as a sign it is time to jump into domestic oil companies because a rally in the commodity usually results in a rally for the whole sector, according to Ninepoint Partners senior portfolio manager Eric Nuttall.

While most of Canada’s major energy stocks have rallied since the end of December, they are barely outpacing the TSX, suggesting that the bulk of their improvement can be attributed to the marketwide recovery as a whole. Suncor Energy Inc., Encana Corp. and Enbridge Inc. have each gained between 15 and 16 per cent in the new year, while the S&P/TSX Composite Index has seen a 14 per cent increase. Canadian Natural Resources Ltd., meanwhile is up 18 per cent.

Other major names such as Imperial Oil Ltd., which is up eight per cent, and Husky Energy Inc., down one per cent, are lagging far behind.

“I’ve been invested in Western-Canadian-Select-exposed names all year, much to my extreme frustration, and the lack of participation has truly been bewildering,” Nuttall said. “When the underlying commodity doubles and the stocks up until recently have done nothing is a real source of frustration.”

Western Canadian Select prices have climbed back above $55 from a historic low of $13.27 in November, Nutall said, due to the production cuts put in place by Alberta Premier Rachel Notley and falling global output due to friction with Saudi Arabia and sanctions on Iran and Venezuela.

And yet there are no buyers at the moment for Canadian energy stocks, said Nuttall, who added that that’s reflected by trading volumes hovering at 70-80 per cent of their average levels.

The inability of energy stocks to gain any significant upward momentum has left some names trading at a discount to their liquidation values, Nuttall said, focusing on two in particular: Baytex Energy Corp. and Crescent Point. Baytex’s share price has only increased by two per cent since Dec. 31 and closed Tuesday at $2.45Crescent Point has been one of the more successful names in the sector and is up 21 per cent in 2019, closing Tuesday at $5.02.

The lack of pipeline approval is still the great unknown

If both increased by 100 per cent, they would only be trading at five time their enterprise value and at a 13 per cent free cash flow yield, Nutall said. By historical standards, both would still be “incredibly inexpensive” even after doubling, said Nuttall, adding that he’s investing in both.

Norman Levine, managing director of Portfolio Management Corporation, said his firm has been invested in Suncor long-term but when oil prices began to take off, it was the cheap valuations in Canada that tempted them to invest in a second name: Cenovus Energy Inc. The stock is up 32 per cent in 2019, closing Tuesday at $12.73, but is still another 16 per cent climb away from reaching its 52-week high.

Even after investing in Cenovus, Levine remains underweight on the sector — one that he said is ripe with political issues that are stopping him for now from investing any further.

“The lack of pipeline approval is still the great unknown,” Levine said. “In the energy patch, Canada is not open for business and that’s why valuations have remained cheap.”


Ninepoint Partners senior portfolio manager Eric Nuttall says there are no buyers for Canadian energy stocks.

Peter J. Thompson/FInancial Post/File

Without clarity, the failure to build pipelines that would allow for more crude to be shipped out of Alberta will continue to hang over the heads of potential energy investors, according to Matt Murphy, an analyst for Houston-based energy investment firm Tudor, Pickering, Holt & Co.

That’s made the rally in both Western Canadian Select and the U.S.’ West Texas Intermediate insignificant to skeptical investors because they’re unwilling to ascribe current oil prices into the value of energy stocks, he said. That’s particularly true of the small cap names in the sector, he said, as there’s a valuation gap between those producers and a company like Canadian Natural Resources. If a stock was trading at six times earnings a year ago, the market may only be willing to give it a multiple of five today, despite the oil boom.

Murphy is skeptical himself. It’s difficult for him to see Western Canadian Select prices maintaining their current levels and a tight differential to its U.S. counterpart outside the short-term.

“If you normalize for let’s say … a Canadian differential investors are willing to underwrite, perhaps it doesn’t make them look as attractive as spot pricing would suggest,” Murphy said. “The signals haven’t aligned to say it’s time to put capital to work in Canada.”

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