Canadian Small-cap Model Portfolio
Energy
We are raising our energy exposure with the addition of Athabasca Energy Corp. (ATH) at a 3.0% portfolio weighting.
WTI oil reached a new 2023 high last week and was one of the best-performing commodities over the summer, rising US$20/bbl (+30% from the June low). We believe that prices remain strongly supported by falling inventories, which have declined more than 10% over the summer, including a 7% drop in the past four weeks to their lowest level this year (Exhibit 1). The sharp depletion has pushed crude stocks to the low end of their five-year (excluding 2020) inventory range and below last year's levels for the first time this year (Exhibit 2). Potentially adding to the downward pressure in crude inventories is the decline in gasoline inventories. After peaking in March, gasoline stocks have trended lower, hitting a 2023 low last week (Exhibit 3). With inventories at the bottom of their five-year band (Exhibit 4), we believe that crude inventories could face additional demand on increased refining activity. This would be supportive of oil prices, in our view.
Following the summer rally, WTI oil (closest contract) is presently 14% above the forward consensus estimate. This marks the widest positive spread in 14 months and is conducive for analysts raising their oil-price assumptions, in our view. With potentially higher oil estimates, we believe that this would lead to positive cashflow revisions (and improved quantitative rankings) for the oil producers. As we show in Exhibit 5, the direction of cashflow estimates for the S&P/TSX Energy sector has tightly followed the movement in oil estimates over the past three years. In decline from the late-2022 peak, we believe that a positive inflection in the forward cashflow trend for the S&P/TSX Energy sector may be near.
With oil approaching US$90/bbl., it has moved prices above what we viewed as technical resistance (US$85, Exhibit 6) and also led its 50-day moving average above the 200-day moving average (golden cross). As a result of this positive price momentum, we continue to prefer oil over copper, and see more upside in the underlying equities (Exhibit 7). The positive momentum in energy is also evident in the U.S., where after a tech-led rally through 2023, energy is again taking leadership (Exhibit 8). We are adding Athabasca to our small-cap portfolio, given its relative price and cashflow strength versus the S&P/TSX E&P sub-sector (Exhibit 9). We also continue to hold a large position in Baytex Energy Corp. (BTE, portfolio weight 5.1%). For Baytex, we believe that the divergence in relative price (lower) and cashflow (higher) over the past nine months versus the S&P/TSX E&P sub-sector could narrow, with Baytex outperforming. This is perhaps already starting (Exhibit 10).