The following is an excerpt from Canaccord Genuity’s Morning Coffee newsletter.
Canaccord Genuity’s Portfolio Strategy and Energy Teams have published a report, highlighting the tailwinds expected to drive Canadian energy and petroleum (E&P) stocks higher in 2014.
The performance of Canadian E&Ps has been disappointing over the past few years, especially in light of the strong showing of their U.S. counterparts. Notwithstanding overall U.S. equities outperformance vs Canadian equities, the underperformance of the Canadian E&Ps has also been a result of concerns around transportation bottlenecks, exacerbated by a continued delay in a decision on Keystone XL, as well as the wealth of oil and liquids resource-play growth prospects enjoyed by the U.S. E&Ps.
However, as we look upon 2014, there are tailwinds on the horizon, setting the foundation for a resurrection in Canadian E&Ps, especially for heavy-oil companies.
The key point to make is that as Canadian oil differentials are narrowing, particularly heavy oil, the Canadian dollar is also weakening, thus providing extra cash flow torque that we believe is unrecognized by investors, especially those outside of Canada.
Therefore, the case for investing in Canadian E&Ps is compelling.
The decoupling between the C$ and oil prices is a key game changer for heavy-oil producers. Our view of a weaker Loonie, tighter oil-quality differentials and firmer higher oil prices is set to improve profitability markedly in 2014.
This positive outlook is not yet discounted in E&P shares, which are trading a cyclical valuation lows, relative to U.S. E&Ps, Canadian pipelines and banks.
Favoured names on this theme: (from Phil Skolnick, Canaccord Genuity Head of North American Energy Research) –
Baytex Energy Corp. (
TSX: T.BTE,
Stock Forum),
Canadian Natural Resources Ltd. (
TSX: T.CNQ,
Stock Forum)and
MEG Energy Corp. (
TSX: T.MEG,
Stock Forum); (from Steve Toth, Canaccord Genuity Oil & Gas Analyst) –
Crew Energy Inc. (
TSX: T.CR,
Stock Forum),
Pengrowth Energy Corp. (
TSX: T.PGF,
Stock Forum) and
BlackPearl Resources Inc. (
TSX: T.PXX,
Stock Forum).