Despite a Santa Claus rally to close 2019, Canadian energy stocks remain undervalued as the sector strengthens into the new year, according to analysts at Laurentian Bank.
The iShares S&P/TSX Capped Energy Index ETF (XEG.TO), a basket of large Canadian energy companies, has climbed 15 per cent since early December as oil prices pushed higher. Those shares gained additional momentum in the wake of the U.S. attack that killed a prominent Iranian military leader last week. The incident continues to raise fear of a supply-disrupting conflict in the key crude-producing region.
Analysts have forecast European Brent crude could reach $150 per barrel under such a scenario. West Texas Intermediate, the North American benchmark, could climb to $80 per barrel, according to Henry Rome at Eurasia Group.
“We believe a prolonged strength of WTI pricing could result in companies shifting from maintenance mode to growth once again and generating additional free cash flow,” Laurentian analyst Todd Kepler wrote in a note to clients on Monday. “Even after the sector rally in December, we believe investors can find bargains on the buy side of the trade.”
Despite the recent strong performance, he said valuations for companies under the bank’s coverage remain at “historic lows” after delivering an average loss of 23 per cent in 2019.
“Illustrative of investor apathy toward the oil and gas equities in 2019, the WTI benchmark increased 31 per cent throughout 2019, while the S&P/TSX Energy Index decreased 13 per cent,” Kepler added.
Greg Taylor, chief investment officer at Purpose Investments, agrees that investor sentiment around Canadian energy has largely ignored rebounding oil prices.
“Energy has come into this year as being one of the most-hated sectors out there, and most under-owned. People haven’t really been paying attention to the stabilization in the oil price,” he told Yahoo Finance Canada last week.
Kepler said his top pick heading into 2019 was Whitecap Resources (WCP.TO), which delivered a 29 per cent total return for the year, including dividends.
“After a tumultuous year in oil and gas equities, we believe companies have taken the necessary steps to set a budget that maximizes free cash flow in a muted growth environment, but can react quickly to higher commodity prices to grow production,” he wrote.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.