To: Goose94 who wrote (48986 ) 9/14/2018 8:27:44 PM From: Goose94 Read Replies (1) | Respond to Crude Oil: Sentiment towards the energy sector, the Canadian one in particular, seems to reach new lows on a daily basis. The irony of this is that oil has rallied by 17 per cent year-to-date (in Canadian dollars) and by 27 per cent since Jan. 1, 2017. And it’s only sitting modestly below a four-year high. After a four-year-long protracted period of enormous price volatility due to a bombardment of new worry after new worry (which always get debunked with the passage of time), many investors have left the sector in search of easier returns (pot stocks that go up 10 per cent a day, Bitcoin, Apple and Amazon hitting trillion-dollar valuations). This is reflected in both a 15-year low energy sector weighting in several indexes as well as energy stocks trading at a fraction of their historical multiples. Effectively over the past four years, energy stocks have suffered from a massive multiple contraction. Current valuations don’t make sense to us: it’s not normal to be able to purchase a business (using current oil prices) at 3.7 times its enterprise value to cash flow when it has about six years of an existing cash flow stream with 56 per cent operating margins that requires minimal capital spending to maintain (with a total reserve life of 13 years) and whose balance sheet is strong (a debt-to-cash flow of one year). On a free cash flow yield basis (available cash flow after spending to keep production flat), the average Canadian midcap stock is trading at a 15 per cent free cash flow yield. This is not normal. Pipeline initiatives: Line 3 which is coming online in 2H/19 (380,000 barrels per day of incremental capacity. Enbridge reached a key land access agreement with the Fond du Lac Band this week), Trans Mountain (in late 2021 to early 2022, assuming a one-year delay with 590,000 barrels per day of new capacity reaching tidewater), and Keystone XL (We’ll have a Nebraska Supreme Court ruling by year-end and the Bureau of Land Management and the U.S. Army Corps’ decision regarding permit in January or February 2019. 830,000 barrels per day of new capacity reaching the U.S. Gulf Coast).
