Cardinal Energy Ltd (Alberta) T.CJ

TD Notes

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Cross Border Barometer

Monthly Performance and Relative Value Tracker

TD Investment Conclusion

In the following charts, we summarize the relative performance of the sub-sectors that comprise the S&P/TSX Capped Energy Index (XEG-T) and the Dow Jones U.S. Oil & Gas Index (IYE-T). We also assess Canada and the U.S. on the basis of relative value. Below, we highlight the key 2021 performance trends.

1. Energy equities rose further as oil and gas prices rallied: The global energy crisis is emerging as a key theme as major global economies such as Europe and China started to experience supply interruptions. Spot WTI prices increased 10% during the month. Natural gas ran hotter, with spot Henry Hub reaching US $5.55/mmBtu (+28% m/m), spot U.K. NBP reaching ~US$27/mmBtu (+60% m/ m) and prompt Japan/Korea LNG surging to ~US$31/mmBtu (+71% m/m). AECO performance was more muted, exiting September at ~C$3.50/GJ (flat m/m). While we believe supply/demand will ultimately rebalance, near-term shortages could persist and sustain prices at these levels, or higher, through the winter heating season. Looking to notable M&A, while Canadian activity was rather muted, in the U.S., Royal Dutch Shell (RDS.A-N) sold its Permian assets to ConocoPhillips (COP- N) for US$9.5bln, exiting one of nine core upstream positions (it also committed to returning $7bln of this total to shareholders). We continue to monitor: a) OPEC+ compliance levels (targeting 400 mbbl/d monthly supply increases; next meets on October 4); b) North American light/heavy oil differentials where the WCS-Houston- WTI differentials narrowed to US$4/bbl from recent high of US$6.25/bbl in late July; and c) North American refined product fundamentals (see our latest Refueling a Recovery note).

• The North American energy equities outperformed WTI spot prices in September (Exhibit 1). The XEG gained 18% (USD-adjusted), underperforming its U.S. counterpart, the IYE, up 8%. For context, WTI spot prices were up 10%, CL12 was up 7%, and the S&P 500 Index was down 5%. We summarize long-term performance trends for the XEG/WTI and IYE/WTI (USD-adjusted) in Exhibit 6 —both remain at near-record lows highlighting the massive long-term relative underperformance of the equities vs. oil.

• In Canada, all sub-sectors were up. The Conventional E&Ps performed the best (+37%), while Midstream, which is perceived as more of a safe haven, benefited the least (+3%). The Integrateds gained 14%, outperforming the U.S. Majors, which were up 9%.

• All U.S. sub-sectors were also up. The Independents (EV of US$3bln-US$10bln) posted the largest gain (+31%) while the Refiners posted the smallest gain (+3%), largely driven by falling crack spreads.

  2. Canadian energy equities discount to the U.S. persists: We continue to see better value in the Canadian Integrateds at a 1.1x discount to the U.S. Majors. The Canadian E&P multiple discount to the U.S. Independents remained largely flat at 0.5x on relatively better performance during the month.