Canada: Stocks build on oil price surge. "Stocks of oil services companies also appear poised for a good run"
Leading TSE sector: Rally should continue, given the low valuations
Financial Post, January 19
Claudia Cattaneo
CALGARY - Canadian energy stocks reached higher yesterday for the fifth
consecutive trading session in anticipation of solid 1999 results and as
investors started to build higher crude oil prices into stock valuations.
The Toronto Stock Exchange oil & gas index, the Canadian industry's
major benchmark jumped 2.8% yesterday, for a two-day gain of 8.2% --
its biggest two-day advance.
Higher global demand, big inventory drawdowns and the first cold
snap in the U.S. Northeast combined to push up crude oil prices in
New York to $28.85 (US) a barrel for West Texas intermediate --
a nine-year high.
The sector has surged since Jan. 11 on indications that the
Organization of Petroleum Exporting Countries plans to roll over
existing production cuts beyond March, likely delaying any increase
in production quotas until next fall.
The latest run-up has the sector leading the pack among subindexes
on the Toronto Stock Exchange 300 composite index. The oil &
gas subindex is up 12.6% in the past week, more than four times the
second gainer, consumer products at 2.9%.
Sector heavyweights like Renaissance Energy Ltd., Petro-Canada,
Alberta Energy Co., Canadian Natural Resources Ltd., Talisman
Energy Inc. and Suncor Energy Inc. were the session's biggest
gainers.
"Oil stocks, after having been pretty much ignored by investors for
the last six months, are very attractively valued," said Margot
Naudie, lead portfolio manager for Green Line Precious Metals
Fund and co-manager of the Green Line Resource and Energy
Fund.
Ms. Naudie said the sector's rally will continue given low stock
valuations, good fundamentals and growth prospects and
expectations of record cash flows in 2000 due to high prices for
both oil and natural gas.
"There is room to move as the stocks are severely undervalued in
terms of historical price to cash flow and price-to-earnings
multiples," agreed John Clarke, oil and gas analyst at Deutsche
Morgan Grenfell.
At this point, the rally appears to be motivated by investors taking
advantage of low valuations, rather than a general sector rotation
back into cyclical stocks and away from last year's high-tech picks,
he said.
Suspicious that OPEC members would jack up production at the
earliest opportunity, investors had discounted an $18 (US) a barrel
price into the values of energy stocks, which trade on multiples of
cash flow.
But many analysts have in recent days bumped up their oil price
forecasts to the $20 (US) level on average for 2000, with some,
like Scotia Capital, betting on $21 (US) a barrel for this year.
While Canada's integrated companies, which produce, refine and
sell oil through gasoline stations, have led the recent rally, Ms.
Naudie's stock picks are in the producing group. She says
exploration and production companies will benefit the most from
higher commodity prices.
Wilf Gobert, head of research at Peters & Co. Ltd. in Calgary, said
integrated companies took a hit in fourth-quarter 1999 from low
refining and marketing margins; still, their earnings will be higher than
for the same period of 1998.
"With the integrateds, it's going to be another case of ...
disappointing downstream profits. The consumer is not going to
believe it, but they have been unable to increase pump prices fast
enough relative to the price increase in crude oil," he said.
There's plenty of upside left in the sector in all subgroups, which
have yet to reach the highs set last September, Mr. Gobert said.
In a rally, blue chips tend to move first, as institutional investors buy
up big stocks. But in the long run, small caps outperform large caps
in a bull market, Mr. Gobert said.
Stocks of oil services companies also appear poised for a good run,
as they have gained less as a group than producers. Canada's
drilling fleet was working at near capacity this week, with only 39
rigs out of 590 still available for hire.
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