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Phil Skolnick: Buy the dip

Why Canaccord's head of North American energy research thinks the recent weakness in energy names is worth taking advantage of

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 mfawcett@albertaventure.com

Sep 24, 2014

by Max Fawcett

Canada’s oil and gas stocks have taken a bit of a pounding of late over concerns that global supply growth will continue to outstrip demand, but Canaccord’s head of North American energy research thinks investors need to gather their courage and hit the buy button. In a note titled “Reasons to Remain Bullish on Canadian Oil,” Phil Skolnick notes that a number of near- and medium-term catalysts, including the startup of Enbridge’s Flanagan South pipeline in the fourth quarter of this year and Enbridge’s Line 3 replacement project, should clear some of the continental supply bottlenecks and allow Canadian crude to flow unimpeded. “Every day that goes by is another day closer to peak operations at BP’s Whiting refinery, the startup of the Flanagan South pipeline and the startup of incremental rail capacity.”

In terms of specific names to buy, Skolnick highlights Suncor Energy (TSE:SU) and MEG Energy (TSE:MEG). On MEG, he likes its logistical options and the arbitrage opportunities they open up for the company. “It is the pure play on the expected Flanagan South uptick,” he writes, “and will be the first to use rail with a DRU [diluent recovery unit], which dramatically improves rail economics.” Suncor, meanwhile, offers investors leverage to both heavy and light oil upside, given that 40 per cent of its production is weighted towards non-upgraded heavy oil and 25 per cent towards Canadian light oil. If the market begins to believe that the days of huge negative differentials between Canadian and benchmark crudes are in the past, Skolnick thinks an increased valuation multiple is a possibility. “At 5.4 times EV/DACF, the stock still has more re-rating potential.”

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