Canadian energy stocks have been under pressure all year, but the pace of selling picked up dramatically last week. The S&P/TSX Energy index is off by more than 12% in the last month, with many stocks down much more. The question now for active managers is: should we be using this as a buying opportunity? Or stay away until the market stabilizes?
Crude oil has been down for 10 straight days, with West Texas Intermediate (WTI) breaking below $60/bbl Friday, after starting October over $75/bbl.
The main reasons for the commodity sell-off ultimately come down to supply and demand. On the supply side, US production continues to surprise on the upside at the same time that OPEC is increasing supply from Iran, Libya and Venezuela. Demand expectations have been falling with weaker emerging markets and China slowdown fears. But none of this news is new, which makes you question if the speed and magnitude of this move has gone too far, too fast.
On the equity side, what has frustrated investors is that the weakness has come just as industry leaders have been reporting strong numbers and executing ahead of guidance. In the US, we have seen solid cash flow from Exxon and Chevron. In Canada, Canadian Natural Resources Limited and Cenovus Energy Inc. have done well despite the widening pricing differentials.
The problems in the Canadian sector are well known and you have to question if the worst has been priced in at these levels. Natural gas is close to the highs for the year while progress is being made on LNG Canada and new pipelines to help narrow the pricing differentials.
Friday’s Keystone XL delay and tax-loss selling may be contributing to the recent sell-off; the timing could be setting up for a tradable bounce.
We are looking for opportunities with this sell-off and have started to pick away in higher-quality names. After 10 straight down days, it may be time to go against the tide. Someone once told me, “the stock market is the only store in the world where shoppers run away screaming when things go on sale.”
–Greg Taylor, CFA and lead portfolio manager