Canadian Oil Sands (Photo credit: Wikipedia)
Cenovus Energy* (CVE : TSX : $35.40)
Husky Energy* (HSE : TSX : $25.71)
Don’t Be Crude Dude ?
With the recent run up in oil prices and wide heavy oil differentials, many have raised questions of late around how to be defensive within the Seniors/Integrated space.
Caution : this sentiment provides further near-term risk to the sector and thus warrants a look at how the stocks reacted historically (he includes the oil sands stocks as well). A driving factor to investors’ concern on oil, besides hitting the psychological triple digit crude price range, is that the net length in Brent and WTI futures/options are close to the all time high reached a year ago.
Some investors are also using last year’s oil prices as a key data point (although there is a view that economy wise, we are in a relatively different territory). To that end, WTI and Brent have been trading at ~US$110/Bbl and US$125/Bbl, respectively. This is in line with the last peaks reached in early April 2011 of ~US$113/Bbl and US$127/Bbl.
Note WTI and Brent subsequently declined by 33% and 19%, respectively, through October 4, 2011.
Also of note –The stocks peaked about a month before oil did during this time (and this may have recently happened again). During this aforementioned period of decline, among the Seniors/Integrateds, the outperformers were
Cenovus Energy (CVE) and
Husky Energy (HSE)
, which fell 16% and 26%, respectively, as each of these were viewed as key defensive stocks.
With some exception to CVE, have not been outperformers YTD, which potentially provides the view that these are again safety nets. On the other hand,
Canadian Natural (CNQ), Canadian Oil Sands (COS),
Suncor Energy (SU)
and Talisman (TLM)
were the largest underperformers. These stocks fell about 40-50% each. Among the oil sands/heavy oil stocks, Baytex (BTE) and MEG Energy (MEG) were the outperformers. Connacher Oil & Gas (CLL) Southern Pacific Resource (STP)
Target price sensitivity analysis supports a repeat of the aforementioned relative performance trend.
Among the Seniors/Integrateds :Nexen (NXY) and SU have the largest downside risk, and these two are the best performers YTD. Among the Oil Sands/Heavy Oil companies, CLL and STP are the most sensitive.
In contrast, Athabasca (ATH) is the least. Note that the stocks are pricing in $86.00/Bbl WTI oil on average, or roughly 20% below the spot,
There may be limited torque left in the stocks once oil prices hit triple digits, which is likely recognized by the recent questions we have been receiving by investors.
Commodity Pricing March 30
Crude oil: $102.78, down $2.63 (3%) Thursday May NYMEX crude oil fell $2.63 to $102.78 while May Brent declined $1.77 to $122.39. Since peaking on March 13 at $126.22, Brent has declined 3%. WTI peaked earlier, at $109.77 on February 24 and is off 6% since that time.
This morning, May Brent is up ~$0.75 while May WTI is ~$0.50 higher as S&P futures have rebounded 0.5%.
Natural gas: $2.15, down $0.13 Thursday
May NYMEX gas plunged $0.13 to $2.15 while Henry Hub lost $0.02 to average $2.01. NYMEX prices plunged after a bearish injection.
Looking forward, we are afraid the cash price will act as a magnet, pulling futures toward $2. This morning, May gas is flat after an encouraging US production report.
Supportive production data: After showing a ~0.2 Bcfpd sequential decline in December, onshore Lower 48 gas production rose a less-than-expected ~0.25 Bcfpd m/m In January.
Other States output surged ~0.35 Bcfpd while New Mexico increased 0.1 Bcfpd and Louisiana fell ~0.15 Bcfpd. Interestingly, Wyoming output was flattish after declining 0.2 Bcfpd the prior month supposedly in large part due to a compressor station fire.
We expected gas production to rise 0.6 Bcfpd sequentially, or 0.4 Bcfpd excluding Wyoming. While production shutins do muddy the waters a bit, the data suggests summer production growth could be close to nil, slightly less than our prior expectation for less than 0.1 Bcfpd of sequential growth.