Energy
We are adding a position in Baytex Energy Corp. (BTE-T) at 3.0%.
After reducing exposure to the energy producers last fall, and with the sub-sector down 8% from its early November high, we are again raising our positioning with the addition of Baytex. As we are now in the earlier stages of what is typically the best seasonal period for WTI oil (Exhibit 1) and the E&P sub-sector (Exhibit 2), we believe that both could be setting up for another rally. Importantly, with WTI oil falling approximately 35% from its June 2022 peak, prices appear to be finding support in the mid-US$70s/bbl (Exhibit 3). Confirming this potential support, in our view, is the recent rotation back to the producers over services (Exhibit 3). WTI oil could also get a lift from a positive turn in sentiment. As we show in Exhibit 4, the net speculative position for WTI oil is at its lowest levels since early 2016. However, we see a potential reversal with the decline stabilizing in recent weeks. Previous builds in the net speculative position have coincided with rising oil prices.
One headwind for the energy sector, of-late, has been the rapid rise in year-over- year crude inventories (Exhibit 5). We would want to see a slowdown in this build before turning more bullish on the sector. However, we believe that supplies could tighten in the near term, with U.S. rig count growth slowing (and declining in the last two weeks, Exhibit 6) and the recent pickup in gasoline demand (Exhibit 7). Global demand should also be supported by China's loosening of its COVID-19 restrictions.
Baytex has declined 28% from its November 2022 peak, underperforming the S&P/ TSX E&P sub-sector by 21%. However, relative cashflow momentum continues to trend higher (Exhibit 8). As a result, Baytex's 12-month forward P/CF has compressed to 2.3x from 3.1x from the November high. In addition, we believe that Baytex is now trading near technical price support (Exhibit 9) and could have considerable upside if our positive views on oil materialize. The addition of Baytex raises our energy producer exposure, which also includes Enerplus Corp. (ERF-T, portfolio weight 2.6%).