Is energy now a stock-picker’s market?

“That’s what we’ve seen on the year, certain stocks are at 52-week highs and other stocks are at 52-week lows.”

That targeting of specific names has benefitted Canoe’s fund performance over the year. He notes that success in energy investing has become truly granular. Even within subsectors there have been leaders and laggards. Much of that now has to do with the financial situation of Canadian energy companies. Szybunka highlights that in an effort to become more shareholder friendly, many Canadian names have built pristine balance sheets. Valuations on these companies were relatively similar across the sector two years ago, but investors over the past two years have favoured those more robust names and Szybunka believes we are seeing some differentiation now.

What’s happening, he says, is that the market is picking its winners. As we see their multiples expand, and other oil names contract, it can be tempting to buy the laggards. However periods like this in the commodity cycle are defined by somewhat weaker demand, and therefore those weaker names often fall off as they’ve lacked sufficient inflows to maintain their valuation. Szybunka predicts that the slight leaders now should be the significant leaders in future.

At Canoe the winners they’ve chosen tend to be long-life inventory names or companies with lots of resources and low operating costs. Those are names like MEG Energy, Ark Resources, and Secure Energy Services. Those are the names that he sees outperforming now, and that he expects will significantly outpace their peers for the foreseeable future.

Szybunka does push back slightly on the weaker demand narrative, noting that a recession doesn’t make for a washout in oil prices. A recession that creates a high unemployment spiral will wash out a significant amount of demand — as the COVID lockdowns demonstrated — but the kind of shorter recession many are predicting now is less likely to cause enough unemployment to wash out oil prices. A recession may see oil trade lower, but past examples highlight short dips rather than structural resets in price. Employment data over the next few quarters may inform the extent of any potential impact on oil prices.

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