Watch volatile markets for deeply discounted energy names
Fear and panic selling generates retirement income for the bold
Friday’s massive market sell-off had many investors spooked. I am not one of them. Lower trading prices spell opportunity, not cause for alarm.
Sure, there may be a recession on the way - economists have been forecasting recession for a couple of years now, sovereign debt is out of control in U.S., Canada and Europe, and the rate of growth in China seems to be slowing.
So what? There have been business cycles throughout history and markets still see returns of about 10% a year since 1950.
The world is not coming to an end because the U.S. only added 114,000 jobs last week.
The long term thesis for Canadian energy names rests on three fundamental precepts:
Demand for electric power will keep growing, fueled by population growth, increasing adoption of electric vehicles, and rapid growth in data centers which are energy hogs.
Oil & gas are not going away, since there are no large scale reliable alternatives other than nuclear and nuclear projects take decades to win permits and more decades to build, usually with NIMBY protests complicating their progress.
LNG projects in Canada and United States keep expanding to supply natural gas short Europe and Asia with liquified natural gas at far higher prices than field prices in North America.
Short term, there is the prospect of a bitter cold winter after last year’s El Nino which produced an extremely warm winter causing a rapid rise in natural gas in storage, as much as 50% over the five year average in many gas hubs. But the ENSO is reversing with La Nina expected by winter, and this typically predisposes North America to a cold period. In parallel, the quantity of natural gas going into storage has been below prior year levels for approaching four months, and the glut in storage is depleting. By the start of winter, I see storage levels back to approximate historical averages and a cold winter can lead to local shortages and very high relative prices.
The start up of TMX narrowed the discount on Western Canadian Select and the start up of the Kitimat LNG facility will draw about 2 Bcf/day of Canadian gas over and above growing demand for electric power, home heating and industrial use. Gas prices are at very low levels today and many investors are dissuaded from investing in gas names owing to the low prices, but in reality the best time to buy natural gas stocks is when natural gas prices are for the time being at low levels.
In my opinion, for what it is worth, the following Canadian oil & gas stocks comprise good value today:
$PEY.TO Peyto is expanding output at very low cost
$BIR.TO Birchcliff is managing the weak markets to protect is vast reserves
$CNQ.TO The industry titan is strong in all areas
$SDE.TO Spartan Delta is simply undervalued, almost ignored
$LGN.TO Logan is small but well run and growing quickly
$CJ.TO Patient money will find a home as Cardinal builds out its SAGD
$RBY.TO Rubellite continues to grow rapidly with a sensible balance sheet
$BNE.TO Bonterra is deeply undervalued, debt is falling quickly and output rising
$PMT.TO Small but profitable and free of costly litigation
$TOU.TO Canada’s natural gas giant impresses each quarter
Market sell-offs should bring many of these names to prices too low to ignore. Patience will pay off.