The Energy Sector: Part 2

Stock Market Outlook

In our November 15th Strategy Note, we said that we were hopeful that we could see some very satisfactory gains over the next year in the TSX since we viewed our previous target of 16,000 for the TSX as very conservative as it was based on an oil price in the low $50’s. 

We said that we still believed that global oil inventories were falling rapidly to normal levels. Importantly, Organization of Petroleum Exporting Countries (OPEC) November 30th meeting resulted in agreement to keep current production quotas through all of 2018 with Russia consenting to this nine-month extension.  We would note that an oil price of $60 a barrel appears to be Saudi Arabia’s targeted floor price since they need almost $90 a barrel to balance their budget. Also, there is virtually no political risk premium built into the current price  ( around $58 a barrel) and recent arrests in Saudi Arabia of princes and wealthy individuals suggest that some such premium could well occur.

We also noted in our recent November 15th Note that the recent rise on the oil price to the high $50’s has not been matched by the Canadian oil and gas stocks. That Note – entitled the Energy Sector- reviewed what had been happening in the Canadian oil and gas sector and what we regarded as the potential opportunity that existed.  We also said that we would be spending the following week in Calgary visiting managements of our equity universe located there. In fact, we had a very absorbing five days of interviews with CEO’s and CFO’s. The net result was that we have become even more optimistic on the energy stocks although – as mentioned previously – one would not have guessed it from the continuing poor price action of many of the stocks in the sector. Our findings we will be the subject of this Strategy Note.

The Energy Sector – Part 2

In our previous Note, we stated that the performance of the oil and gas sector in Canada had been a lot worse that in the U.S. outside of some of the major integrateds – in particular Suncor and Canadian Natural Resources. We also learned in Calgary that one of the problems for the intermediate producers has been that those two integrateds plus Enbridge, Pembina Pipeline and TransCanada now account for almost two thirds of the energy index weighting. With this high degree of concentration, a number of institutions had concentrated their holdings in these five stocks – in effect becoming closet indexers – to the detriment of the intermediate producers whose weightings in their portfolios had suffered significant cuts.

Download to read more