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Who let the bulls out?

Why everyone's suddenly bullish on energy stocks

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

Mar 31, 2014

by Max Fawcett

It wasn’t that long ago that Canadian energy fund managers were bemoaning the market’s unwillingness to recognize the value in the stocks they held. No longer. As Sprott’s Eric Nuttall pointed out on a quick hit on BNN on Friday afternoon, the tide has officially turned. “I was in New Orleans earlier this week at the largest oil and gas conference in the U.S. [Howard Weil] and met with some very, very U.S. energy investors. I got a sense from them that they’re finally recognizing the disparity in valuations between Canada and the U.S.” And despite some recent strength, that disparity still remains – U.S. names are trading at 8.3 times price to cash flow, Nuttall said, while Canadian names average just five to 5.5 times. Canadian funds have recognized that gap for a while, he said, but it’s the bigger U.S. fund managers and investors who can really move the needle. “The average Canadian mutual fund has been generally market weight to overweight energy for a while, so we’ve needed that incremental buyer. And we’re finally getting it.”

But is the catch-up period finished? Not even close. “If you look out to 2015, many of these stocks are still trading at five to 5.5-times EV/cash flow, and the sustainability of their business models allow for growth of about 20 per cent (spending one-times cash flow) or for some paying upwards of a seven per cent dividend and growing production by 10 per cent. There’s still good upside in many names.”

Meanwhile, earlier on Friday, Sam La Bell, the VP of energy and special situations (now there’s a great title) with Veritas Research, suggested that the time to buy into those Canadian names might be right now, before they report their quarterly results for Q1 2014. That’s because, as he pointed out, the combination of narrowing spreads and a falling Canadian dollar means the first quarter featured the highest Q1 Canadian dollar liquids pricing that the sector has ever seen. Yes, ever. “Across the board, liquids producers in Canada (in Canadian dollar terms) are going to show very, very high year-over-year comparisons in their cash flows.” Indeed, WCS pricing is up 20 per cent over the previous quarter alone, and 35 per cent higher than Q1 2013 – a reality that will be particularly beneficial to big players like Canadian Natural Resources (TSE:CNQ) and Cenovus (TSE:CVE). “Whether that holds up as strongly as it has remains to be seen,” La Bell said, “but I believe it’s going to be a great year for Canadian dollar oil pricing.”



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