Energy stocks have upside for investors
Uncertainties or risks can be mispriced
While global equity markets have for the most part posted a respectable recovery from their March 2009 recession lows, the Canadian energy sector has been left far behind.
For example, the S&P 500, MSCI EAFE and S&P/TSX are up approximately 81%, 46%, and 40%, respectively, since the end of March 2009. The S&P/TSX Capped Energy Index, meanwhile, is up only 8% over the same period.
In my view, this is a perfect example of investors shying away from uncertainty. Capital will flow to where there is a better risk/ return relationship and the current level of uncertainty in the Canadian energy sector is clearly too much for investors to handle.
However, being a contrarian, such uncertainties or risks can at times be mispriced, thereby creating opportunities for long- term investors. The important questions to ask are: Can these uncertainties be favourably resolved and, if so, are they fully factored into valuations?
When determining whether to invest in a particular stock, sector, market or even country, a great first step is determining its strategic value. This value can be enhanced or taken away in short order, depending on the actions of those at the helm.
In the case of the Canadian energy sector, it appears to have lost its strategic value on the global stage because of a number of factors and investors have reacted accordingly.
To begin, there is clearly an infrastructure problem at the moment in Canada thanks to the underestimated growth in U.S. oil production. This is expected to continue with further uncertainty on the horizon until a decision is made on the Keystone pipeline. Investors will likely sit on the sidelines at least until then.
Then last week, Alberta’s environment minister Diana McQueen made some comments regarding the province’s consideration of a new, more punitive carbon tax. If the government was a poker player, it would be out in the first round for playing its cards too early. Why not simply wait with investors until some clarity is provided on Keystone’s approval?
Her comments could not have come at a worse time, because they create further uncertainty and will do little to appease environmental groups who, in reality, want to see the entire industry shut down.
canadian oil stocks have sold off to very attractive levels
All of these issues will eventually be resolved in short order, creating an opportunity for contrarian investors.
Canadian oil stocks have sold off to very attractive levels and, in many cases, reflect much lower oil prices in their valuations. Therefore, the upside potential for Canadian oil stocks from Keystone’s approval outweighs the downside that appears to be already factored into company valuations.
If Keystone is not approved, then other options will be undertaken, such as transporting oil to eastern Canada for refining and export, which is an option that should be undertaken regardless of Keystone’s fate.
Finally, regarding the potential for a new carbon tax, I hope the Alberta government has learned from the past, especially its disastrous New Royalty Framework, and takes its time before implementing any policies that will result in investors leaving the province rather than returning.