Since mid-May, oil has fallen by about 13% while energy stocks have been obliterated. In recent days, with stocks falling by 8%-10%, the action feels capitulative. Why have energy stocks collapsed, even when they were mispriced in our opinion to begin with?
For much of the year, energy was the only positive performing game in town and we had received much feedback from advisors that having energy allocation had “saved their year.” Could it be that with recessionary fears increasing and the broader market selling off further that energy stocks have been a source of funds? Is it easier to sell your winner or sell your losers? This could partially explain it.
Currently, fear of a recession is causing extreme concern about the outlook for oil demand. We do NOT share these concerns. Real time gauges suggest ZERO degradation in demand so we are essentially fighting the equivalent of the boogeyman, while we can forecast that looming supply growth challenges will offset any degradation in demand growth. All we can do is continue to monitor our macro indicators for any sign that we are wrong but these two that we follow suggest our macro call remains valid:
On to energy stocks, they have been absolutely obliterated with some falling by over 35% in the past 2 weeks. Feedback from traders today suggests there is NO large selling, but rather retail panicking, institutions preferring to sit on their hands given the volatility, and algo/quant funds having a field day.
What of valuations? The panic of today to me feels exactly like March 2020, which is staggering as oil is still trading above $100WTI. We still believe in all of the tenets of our multi-year bull market thesis and as such believe in a $100WTI fundamental floor over the next 5-6+ years, while acknowledging that at times we can undershoot this if panic becomes rampant. At $100WTI energy stocks are PROFOUNDLY mispriced:
Even if oil were to collapse, energy stocks would remain attractively valued with the sector trading at an average free cashflow yield of 18% at $70WTI:
In summary, we remain very bullish, and can find little to no fundamental explanation for the severe pummeling of recent weeks. Below is a report from RBC that corroborates what we are seeing in the physical market, and we have to the best of our ability exposed the fund to high quality companies, trading at valuations that make no sense to us, and who have committed to returning most if not all of their free cashflow back to us in the form of dividends and buybacks. As in the past, this too shall pass and we are adding to core names as funds flow allows.
Senior Portfolio Manager
|'S&P/TSX CAPPED ENERGY TR||11.6||66.0||29.9||73.2||114.2||28.3||11.4||4.6||1.2||5.5|
1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at May 31, 2022. The index is 100% S&P/TSX Capped Energy TRI and is computed by Ninepoint Partners LP based on publicly available index information.
The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: concentration risk; credit risk; currency risk; cybersecurity risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; interest rate risk; liquidity risk; market risk; regulatory risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; small capitalization natural resource company risk; specific issuer risk; tax risk.
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