This may not seem like the Canadian energy sector’s time to shine, what with the country in an economic crisis and the U.S. President insisting our oil is not needed stateside. But here we are. I’m investment reporter Tim Shufelt and today we’re looking at the surprisingly strong setup for the domestic oil and gas industry. We’ve also got some stock picks for you courtesy of CIBC’s chief market technician. Plus, the Magnificent Seven falls on hard times.
Oil rig floorhands from Akita Drilling work on an oil rig at the Cenovus Energy Christina Lake Steam-Assisted Gravity Drainage (SAGD) project 120 km (74 miles) south of Fort McMurray, AlbertaTodd Korol/Reuters
ENERGY
‘We don’t need their oil’
Yes, you do.
Donald Trump doesn’t do nuance. When he says the U.S. has no need for Canadian oil and gas, he’s basing that on the fact that America is the world’s largest oil producer. Plus, Trump believes he can supercharge domestic production by declaring a “national energy emergency” and saying “drill, baby, drill” into a microphone lots of times.
Two problems with that plan. First, most American refineries in the Midwest are built specifically to process heavy crude like the type that is produced in Alberta’s oil sands. And second, U.S. oil companies do not appear inclined to start drilling rampantly.
For a new well to break even, producers need an average West Texas Intermediate price of at least US$65 a barrel. As fracking pioneer Harold Hamm said at a conference in Houston a few weeks ago, nobody will be drilling below US$80. This doesn’t exactly mesh well with Trump’s stated desire to see oil drop to $50 a barrel.
If you want to get a sense of how energy executives are feeling right now, check out some of the responses to the energy survey conducted by the Federal Reserve Bank of Dallas. Here’s a fun one: “The administration’s chaos is a disaster for the commodity markets. ‘Drill, baby, drill’ is nothing short of a myth and populist rallying cry.”
Back to the Canadian oil patch. When Trump turned on Canada and said tariffs would include our oil exports to the U.S., the fear was that Western Canadian Select (WCS), the country’s key heavy oil blend, would get crushed. Instead, the WCS discount to U.S. crude has shrunk to around US$10 a barrel recently, which is even lower than the long-term average.
One reason for that strength is Trump’s targeting of Venezuelan oil exports, which is of a similar grade to Canadian crude. Any country importing Venezuelan crude could face additional 25-per-cent tariffs on their exports to the U.S., Trump threatened this week.
“The current strength in the price of Canadian heavy oil may not persist, but we are more confident that it will not suffer a big hit if President Trump follows through on his pledge to slap tariffs on Canadian energy,” BMO senior economist Art Woo wrote in a note.
Stock prices have held up pretty well, too. The S&P/TSX Capped Energy Index is up by nearly 15 per cent over the past month. Imperial Oil Ltd. is trading just a shade off its all-time high set last November. Canadian Natural Resources Ltd., Suncor Energy Inc., and ARC Resources Ltd. have all seem big bumps in share price.
The combination of strong balance sheets, low debt, ample cash flow and industry supply constraints has some bulls pounding the table. Cole Smead, CEO of U.S.-based Smead Capital Management, said “this is the second-best buying opportunity of the last 20 years in the oil business.” (The best opportunity, he said, was March, 2020, shortly before oil prices went negative for the first time in history.)
A bonus for the very long-term investor
An open letter from oil and gas CEOs recently called for major changes to how energy infrastructure is developed in Canada. They asked for things like fast-track approvals and the elimination of emissions caps and carbon levies. Conservative Leader Pierre Poilievre has already committed to the reforms should his party form the next government.
Priorities are clearly shifting in the face of Trump’s trade war. A recent Abacus survey reported that a tiny minority of respondents identified climate issues as a top concern.
It’s too early to “distinguish winners and losers from this initiative,” CIBC analyst Robert Catellier said in a note. But, he added, “we expect this issue to gain momentum over time.” To the extent that Canada could increase its export capacity over time, that would likely be of greatest benefit to the oil and gas producers themselves.
STOCK PICKS
CIBC unveils its best investment ideas for April
There’s a certain alchemy to technical analysis that eludes anyone who prefers to communicate in any of the major languages of the world. Consider this tidbit from Sid Mokhtari, CIBC’s chief market technician:
“Technical oversold readings may have already reached trough levels with an increasing number of SPX and NDX members printing sub-30 markings in their daily and weekly RSI factors.”
A great deal of chart patterns ensued, which ultimately spits out the following Top 10 names for the month:
- Fairfax Financial Holdings Ltd.
- Definity Financial Corp.
- Waste Connections Inc.
- Stantec Inc.
- TC Energy Corp.
- Keyera Corp.
- ARC Resources Ltd.
- Empire Company Ltd.
- Dollarama Inc.
- Choice Properties REIT
CHART OF THE DAY
Talk about a flip of the script. For two years, a handful of mega-cap tech stocks have been dominating financial markets and generating a big chunk of the returns that index investors globally have realized over that time. Then everything seemed to reverse with the turn of the calendar – from growth to value, from tech to defensives, and from U.S. to international. None of these forces, of course, favours the Magnificent Seven stocks, which collectively dropped from their peak by 20 per cent up to the end of March. All seven are negative on the year, with Tesla Inc. leading the race to the bottom.
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
Globe Investor highlights
Gold is enjoying a spectacular run. Is the rally just getting started? David Berman weighs in
The boring, balanced portfolio is back to doing good work for investors, says Rob Carrick
Canadian investors tell us why they’re keeping their U.S. stocks
What’s up next
Tomorrow will undoubtedly be a big market day in the aftermath of ‘liberation day’. We’ll be covering every moment of the action at globeinvestor.com. On the economic data front, key an eye on the monthly U.S. and Canadian jobs reports come Friday.
See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)