CALGARY – The Canadian energy industry has surprised investors and massively outperformed the broader market in recent months, but fund managers and analysts are warning clients to remain cautious given the market’s extreme volatility.
The Canadian energy industry has outperformed the broader stock market in recent months. The S&P/TSX Capped Energy Index has surged 31.5 per cent during the second quarter so far, compared with a 16.34 per cent increase in value for the S&P/TSX Capped Composite Index over the same period.
Still, the energy index is down close to 46 per cent since the beginning of the year. By comparison, the composite index is down just 8 per cent from the start of 2020.
True to form, Wednesday marked another highly volatile trading day as the WTI crude oil benchmark fell 5.8 per cent to US$38 per barrel after U.S. crude oil storage hit a new record and coronavirus cases rebounded in major economies. The global Brent crude benchmark tumbled over 5 per cent to US$40.31 per barrel.
Some Canadian oil and gas stocks fell but by a smaller margin. Suncor Energy Inc. shares tumbled close to 4.7 per cent, to $22.75 by close on the Toronto Stock Exchange, while Husky Energy Inc. fell 5.33 per cent to $4.4.
The most recent plunge comes just as major investment banks began increasing their price targets on Canadian oil and gas players anticipating a rise in crude oil prices as major economies reopen.
On Wednesday, Citibank raised Cenovus Energy Inc.’s target price to $9 from $7 per share, for Suncor Energy Inc. to $31 from $28, and Imperial Oil Ltd. to $23 from $21.
“Downstream demand has partly recovered, and the upstream should pace this. Storage appears sufficient in light of production cuts and ample egress capacity,” wrote Citi analyst Prashant Rao. “While we maintain a modest preference for more integrated operators, oil price is recovering, potentially tipping us towards more Upstream exposure ahead. ”
National Bank Financial analysts believe the quarter will go down as one of the most volatile quarters in crude oil’s history, referencing the gyration for WTI prices from an all-time low of –US$37.63 per barrel in mid-April to more than US$40 per barrel in June.
On Wednesday, the bank raised its prices outlook for the second half of the year to US$38.5 per barrel, six dollars higher than its previous estimate and also boosted its WTI assumptions by a dollar to US$43.75 for next year. The bank also upgraded Canadian Natural Resources Ltd.’s stock to outperform as it expects a 68 per cent surge in price to $39, from its current level of around $23.4.
Still, other energy fund managers see plenty of reasons to remain defensive amid the uncertainty and volatility.
“The market is telling you every day that you should be cautious,” said Rafi Tahmazian, director and senior portfolio manager at Canoe Financial, noting that some weeks energy stocks have traded up 10 per cent at the start of the week only to lose all of those gains by the end of the week.
“Today there’s a premium that should be put on a defensive strategy and anybody that thinks otherwise is just ignoring the realities,” Tahmazian said, noting that right now there are half a dozen separate dynamics playing out in energy markets that could pull stocks in different directions.
The issues he sees include the global oil supply battle between The Organization of the Petroleum Exporting Countries (OPEC) and the U.S. shale sector, the rise in coronavirus cases and resultant oil demand destruction, moves by governments to provide stimulus, and the U.S. election.
With a significant portion of Canadian oil shut in, production is not firing on all cylinders, and is unlike to do so anytime soon as it could upset the fragile demand-supply balance.
Investment brokerage firm Peters & Co. Ltd. estimates Alberta in situ bitumen production was 1.16 million barrels per day in May, 315,000 bpd lower than its peak in December, and the lowest level since spring of 2017, as producers continue to shut in output. Active oil rig counts in Canada stood at just 5 in mid-June, compared to 59 during the same period last year.
Wood Mackenzie released a report Wednesday showing the oil price crash had vaporized US$1.6 trillion from upstream oil and gas valuations globally, with the oilsands “hit hardest in percentage terms — down more than 50 per cent.”
In addition, Wood Mackenzie noted that upstream investment in Canada is projected to fall by US$8 billion this year. “With Canada having never fully recovered from the 2015 downturn, 2020 capital spending is now expected to be nearly 80 per cent lower than 2013 levels.”
Canadian oil industry’s outlook remains uncertain for now, but long-term bulls are keeping the faith.
“I have a vision in a longer cycle that looks very constructive,” Tahmazian said, but noted that the short-term volatility in the industry presents a lot of risks that need to be defensively managed right now.
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