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Given the extreme weakness in energy stocks over the past week I thought it worthwhile to send out a brief note.
To begin let me state the obvious:
The energy market to me feels like December 2015 when names were gapping down 4%-5% a day. The difference now versus then though is the profound dislocation between the commodity and the stocks with oil generally being strong versus it collapsing from $40-$35/bbl in December 2015 (ah, the good old days) . Oil is up 23% since January 1, 2017 and the XEG during the same time frame is down 25%. That is a whopping 48% divergence. As a result energy stocks are trading at the cheapest forward valuations using strip ($66.46/bbl) in memory.
How did sentiment go from “oil is heading to $100/bbl in 2019” a few months ago to now forced liquidation in energy stocks?
So what does all of this mean? There is panic, fear, and total frustration resulting in investor capitulation in energy stocks. Names like CPG are making ALL TIME LOWS ($5.75…down from $40.00 four years ago). Quality names like a Baytex have fallen by 55% in 5 months while oil is down 8% over the same time frame. Even SU and CNQ have been destroyed. Many stocks using $70 oil in 2019 (we think it goes higher) are trading at the cheapest levels in 10+ years. So what? If investors do not care I believe corporates will. This will be expressed in the form of increased buybacks and takeovers (both hostile and friendly). MEG is a great example where investors viewed weak Canadian heavy oil pricing as permanent versus a 1-2 year problem trading the stock down from $11 to $8 and allowed Husky to make a hostile offer at a price that we believe is 60% below fair value.
I will avoid using too many clichés but here is one incontrovertible truth: the hardest time to buy is when it feels the most painful and least obvious. We have been topping up our main positions despite them falling by 5%-7% a day with the belief that we are going to double or triple our current purchases with the passage of time. Will this be like 2016 when our Fund rallied by 143% by year end after experiencing a horrible December 2015? Only time will tell. In our view not much has changed on the oil macro. With Iranian exports about to imminently collapse, refineries emerging from turnaround season, and China posting record demand growth in the past month we still believe that fundamentals for oil are positive and that we are in a multi-year bull market for oil. I would challenge you to find another sector in the world that is so out of favour, trades so inexpensively (3x CF…15%-20% FCF yields), and yet has such positive medium and long term fundamentals.
Please reach out with any questions you have.
Partner, Senior Portfolio Manager
Ninepoint Energy Fund / Ninepoint Energy Opportunities Trust
BTE down from $6 to $2.55 in 5 months…
CPG making new all-time lows at $5.75..down from $40 (we would not advocate buying it…prefer others)
Trican down from $5 to $1.66…now trading below the liquidation value of the company’s assets…
A sampling of some horrific 1 month performance
26 energy names making 52 week lows in Canada today
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 September 30, 2018; e) 2004 annual returns are from 04/15/04 to 12/31/04. The index is 100% S&P/TSX Capped Energy TRI and is computed by Ninepoint Partners LP based on publicly available index information.
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