Analysts estimates are improving

Production and cash flow forecasts are close to actuals

Every quarter, energy investors wait eagerly for the reports of Canadian energy names with the Twitter space alive with a combination of fear and excitement as investors await the news. The efficient market hypothesis (EMH) first made popular by Nobel prize winner Eugene Fama is ignored as many investors claim unique insight and make their trading bets accordingly.

I thought a comparison of Q3 actual results versus consensus and TD Waterhouse analyst estimates would shed some light on how useful (or useless) that exercise is. Here is that comparison for a number of popular energy names.

For seven energy names, the sell-side analysts underestimated cash flow per share by as much (or little if you prefer) as 5.1% and for the 15 names listed, overestimated cash flows by 1.4%. Given the volatility of commodity prices, effect of hedge books and individual company drilling costs and production costs, an error of 1.4% is impressive for its accuracy, and if the miss for Advantage Energy (AAV.TO) were ignored, the analysts on balance nailed the quarter.

Production estimates were extremely accurate with a range of plus 3.6% to minus 2.2%, again impressive for this set of companies.

My conclusion - trading against quarterly estimates is a mug’s game. Actual results generally line up well with analysts’ projections and where there are divergences, they are immaterial to long term value. Investors can safely make their investment decisions using the latest available research from top rated analysts and ignore the day to day price volatility of their holdings.

A sensible strategy in volatile markets is to buy well and hold. Let’s see how that strategy might have worked for Ninepoint Energy Fund, based on the Fund’s excellent holdings as of July 1, 2020. Gains to date would have been over 700% excluding dividends.

Some investors either prefer or need dividend income. A strategy to buy dividend paying energy names also worked out well for those that bought and held names like Birchcliff (BIR.TO) Peyto (PEY.TO) Tourmaline (TOU.TO) ARC (ARX.TO) and Whitecap (WCP.TO) with cumulative gains and dividends doing better than the capital gains strategy illustrated above. Birchcliff, Peyto and Whitecap all traded south of $1.00 a share in 2020; ARX traded down to the $3.00 range and Tourmaline was in the low $20’s. Birchcliff now pays annual dividens of $0.80 per share; Peyto $1.32 a share; Tourmaline (with extras) about $9.00 a share and ARC Resources and Whitecap dividends in the 4% range based on today’s stock prices but more than 10% based on their 2020 share prices.

It took courage to buy these names in the mid-2020 period when the outlook was dire, oil & gas prices were in the dumpster, and sell-side analysts were screaming “SELL” or its equivalent. But that is where the real money is made.

The purpose of this article is to make the point that sell-side analysts tend to be lagging indicators of little value in picking deeply undervalued names when markets are deeply depressed. The risks of recession are elevated, and should a deep recession ensue it will create opportunities similar to those that followed the COVID outbreak. Keep some cash in reserve and be patient - energy remains an undervalued and under-appreciated sector and there will be opportunities in the coming down turn.