With OPEC deal, it’s the right time to buy hot energy

With energy stocks surging following the announcement of an OPEC production cut on Wednesday, investors are once again asking whether it’s time to buy.

Following the broad-based deal in Vienna to cut as much as 1.8 million barrels per day between OPEC and non-OPEC members, benchmark crude prices surged nearly 10 per cent Wednesday. They continued to climb Thursday, with West Texas Intermediate surpassing the $51 threshold.

“Once the OPEC came through, it was more material and more positive than we would have expected on every front,” CIBC analyst Jon Morrison said.

The question for investors — who are still hesitant following two years of volatility and steep collapses in oil prices — is whether markets have fully recovered from their previous lows. Some analysts have warned that oil markets have been overhyped in recent days, and that prices will slump if OPEC members fail to follow through with their production targets.

But most agree that on a fundamental level markets are already more or less in balance, which should provide space for growth in coming years.

“I still think it’s a good time to step into the space,” Morrison said.

“Even though we think there’s going to be a temporary flattening over the next little while, we don’t see the market structure going down.”

The OPEC deal itself was larger than most analysts expected, and could potentially place a floor beneath oil prices in the near term.

“The main thing about this deal is there’s a lot less risk that oil prices go back to $40, or below that,” Desjardins senior economist Mathieu D’Anjou said.

Justin Bouchard, also an analyst at Desjardins, released a research note Thursday that delved into the free cash flow and free cash flow yield in five of the largest Canadian oilsands producers, including Husky Energy Inc., Imperial Oil Ltd., Suncor Energy Inc., Canadian Natural Resources Ltd. and Cenovus Energy Inc.

The report made Husky its top pick, and moved the company’s target price from $21 to $23. At WTI prices of US$60 per barrel, the analysts guessed the company’s stock could ofer investors nine per cent cash flow plus growth yield.

“Husky’s stock price, at least on a relative basis, is very compelling when you compare it to the other four companies,” Bouchard said.

Suncor was moved from a buy to a hold, while its target price was moved from $41 to $48. Suncor and CNRL had the next highest estimated cash flow yields after Husky, at eight per cent. The lowest was Cenovus, at six per cent.

He said companies that were most directly impacted by oil prices, including MEG Energy, Pengrowth Energy Corp. and Gear Energy Ltd. saw some of the biggest gains in recent days. MEG was up 13 per cent since Wednesday.

CIBC’s Morrison, like others, says the fundamentals of the market are most likely to push prices gradually upward in 2017. CIBC estimates prices will reach between $55 and $60 by the end of the year.

“And with that is going to come a reinvestment back into the North American energy sector that we haven’t seen for the past two years,” he said.

Morrison’s top picks for oilfield services companies include Precision Drilling Corp., Canyon Services Group Inc. and Secure Energy Services Inc. Secondary picks include Western Energy Services Corp. and Trinidad Drilling Ltd., who CIBC recently listed as outperform.

In a morning research note, CIBC increased its target price for Tourmaline Oil Corp. from $40 to $45.