Markets can be irrational . . .

But you don't have to be!

On December 31, 2021 the West Texas Intermediate (WTU) oil price was US$76.75 a barrel and the Henry Hub natural gas price was US$3.85 per thousand cubic feet.

Today, WTI is US$96.30 and Henry Hub natural gas is US$6.62. In summary, the benchmark oil price is up 25% since year end 2021 and the benchmark natural gas price is up 72%. You would think oil & gas investors would declare a national holiday but instead they are wringing their hands, dumping their oil & gas stocks, and despairing about how unfair markets can be.

The tale of three oil & gas stocks tells the story. At December 31, 2021 Headwater (HWX.TO) traded at CAD$5.15 a share; Whitecap (WCP.TO) at CAD$7.49 a share; and, Cenovus (CVE.TO) at CAD$15.51 a share.

Today Headwater is trading at CAD$5.18 a shares; Whitecap at CAD$8.32; and, Cenovus at CAD$21.69, increases of less than 1% for HWX, 11% for WCP, and 40% for Cenovus. Has anything terrible happened to cause the valuations of these stocks to lag the commodity price increases? Let’s review the bidding:

In Q1 2022, Headwater reported a 158% rise in year over year production, the highest net income in the company’s history, and a balance sheet with no debt and working capital of CAD$80 million. The company continues to generate free cash flows at a rate of about 25%. I am a bit old fashiond but I think I am going to keep my 15,000 shares of HWX.TO stock and perhaps add a bit more if the current sell off persists.

In Q1 2022, Cenovus completed its acquisiton of Husky Energy and reported revenue gains of over 75%, a seven-fold increase in net income, and plans to rapidly repay the acquisition debt which are running ahead of plan. I estimate Cenovus will turn in free cash flow of CAD$8 billion this year, about equal to its remaining debt at the end of the first quarter. I am going to add to my Cenovus holdings, not despair.

In Q1 2022, Whitecap reported a 38% rise in production, 169% higher cash flow and a 96% increase in its dividend. Time to panic? I don’t think so. My 15,000 Whitecap shares are safe and will be part of my portfolio for the longer term.

I recognize that markets look ahead, and today they see recession on the horizon, which seems likely. Inflation is running amok and higher interest rates will slow economic growth and push the economy into a slump almost certainly. But is that time to rush the exit doors? Not me, fella.

OPEC sees demand exceeding supply for oil in 2023 by a million barrels a day and we are heading into winter in a few months with low natural gas storage levels. Natural gas prices in Europe have gone through the roof and oil substitution is contemplated which will add to the oil supply problem. From a macroeconomic perspective, looking beyond any recession, it is hard to be negative about the outlook for oil & gas.

I see the current malaise in energy stocks as a buying opportunity. But I caution, bear markets should be treated with respect and adding to holdings should be done much like drinking fine wines - in small sips.