14 February 2018 0 Comments Posted By : Jonathan Ratner

Is now the time to buy energy stocks?

Oil and gas equities have been underperforming crude oil prices since the middle of 2017, but the outlook for energy stocks deteriorated further in the past two weeks, as major oil benchmarks have declined more than 10 per cent.

That leaves investors wondering whether now is the time to be buying, or is a more cautious strategy warranted?

After peaking above US$66 per barrel on Jan. 25, WTI has slipped nearly 12 per cent to below US$59. The S&P/TSX Capped Energy Index is down 14 per cent during that same period, but more importantly, the Canadian energy equity benchmark never experienced the big rally off the summer 2017 lows that crude did.

WTI surged as much as 55 per cent after dipping below US$42 in June. The TSX energy index only climbed about 23 per cent.

With valuations for oil and gas stocks approaching decade lows, BMO Capital Markets analyst Randy Ollenberger believes opportunities are emerging.

“We do not think it is time to panic,” he told clients, noting that while oil prices have weakened on the prospect of rising interest rates, underlying fundamentals are improving, and it is unlikely that oil falls below US$50 per barrel.

Consensus estimates indicate that the Canadian oil and gas group is trading at a 5.1x forward EV/EBITDA multiple, and the U.S. group is at about 5.6x. That represents the largest discount to the overall market in the last 10 years.

“Investor exposure to the North American oil and gas group is at multi-decade lows,” Ollenberger said. “In our opinion, these valuation levels are attractive relative to historical trading ranges and the overall market.”


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