Investors turn bullish on oil, gas stocks

Shares of North America's hard-hit oil and gas producers are climbing sharply as investors bet COVID-19 vaccine rollouts will ease the pandemic's travel restrictions and revive fuel demand.

The gains, which have pushed the Canadian Energy Sector Index up over 40 per cent since Nov. 9, come as oil prices rise well above spring lows and big producers plan to raise spending and output in 2021.

However, the bounce still leaves the index down 36 per cent in the year to date.

“Some stocks still have the potential to double next year in our view, even after the sharp rebound of the last five weeks,” said Jean-louis Le Mee, head of London-based hedge fund Westbeck Capital Management, which owns shares in Canada's MEG Energy, Whitecap Resources and Baytex Energy.

Hopes that vaccines will lead to increased economic activity are moving investors to beaten-up sectors. U.S. energy stocks are having their best quarter since 1989, though they are still down 34 per cent for the year. Oilfield services companies, whose business depends on the pace of production, are popular again, with an index of companies up 60 per cent since Nov. 9.

Canadian oilsands companies have been depressed for years due to high production costs and carbon emissions.

A New York State pension fund last week said it aimed for net zero emissions by 2040 and is re-evaluating its holdings in nine oilsands companies, the latest big investor to shun Canada's sector.

But Canadian producers look especially attractive now due to high cash flow potential, and as U.S. energy companies face possible restrictions under environment-minded president-elect Joe Biden, Le Mee said.

Canadian Natural Resources, Suncor Energy, and Imperial Oil — three of Canada's top producers — have forecast higher output next year and bumped up their budgets.

Shrinking discounts on Canadian heavy oil, which cover additional refining costs and transportation to U.S. refineries, have helped. The discount sits at US$14 per barrel, compared with US$21 a year ago, according to NE2 Canada, narrowed by tight global heavy oil supply.