Workers tap deep into the North Dakota Bakken formation on a Precision Drilling rig.NATHAN VANDERKLIPPE/The Globe and Mail
On Monday, North American crude oil fell below $80 (U.S.) a barrel for the first time in more than two years after Goldman Sachs predicted it could sink deeper, but a Calgary-based portfolio manager is not panicking.
The rapid pullback in commodities will limit the cash flow of producers as they plan budgets for 2015, prompting stock prices to get knocked down across the board, said Garey Aitken, portfolio manager with Franklin Bissett Asset Management, part of Franklin Templeton Investments Corp.
Still, the selloff has overshot the mark in terms of valuation, spelling opportunities to invest in companies at bargain prices, Mr. Aitken said. The S&P/TSX energy index fell 3 per cent on Monday, and has lost more than a fifth of its value since the start of September.
"We think that the stocks have overreacted to the downside, based on the [oil] price change," he said.
That was the case with Precision Drilling Corp., which reported an 82-per-cent increase in third-quarter profit and a 17-per-cent boost in its dividend on Monday. The shares skidded more than 8 per cent.
"With these contract drillers, and Precision has the largest market cap of the Canadian-listed drillers, we have to recognize that is one of the deepest cyclical parts of the services sector," Mr. Aitken said.
"To the extent that their leverage is to drilling activity, exploration and production entities, with a lower commodity price environment, are likely to either drill less or pricing is going to come under pressure."
Indeed, Precision lowered its 2014 capital spending budget by $28-million (Canadian) to $908-million.
Goldman Sachs issued a report saying crude prices have further to fall and won't recover until some U.S. shale oil producers are squeezed out of the market. West Texas intermediate crude fell to a 28-month low of $79.44 (U.S.) a barrel before rebounding to close at $81.
Mr. Aitken said he focuses on the long-term futures market for oil and gas rather than daily gyrations in the spot market, and he is not convinced that crude will keep falling.
"We've seen this big selloff, but I don't think the next $10 [a barrel] is any more likely to be to the downside than the upside," he said.
Editor's note: A previously published version of this article stated Garey Aitken's affiliation as a portfolio manager with Franklin Templeton Investments Corp. Mr. Aitken is a portfolio manager with Franklin Bissett Asset Management, which is part of Franklin Templeton Investments Corp.
Jeffrey Jones