Heavy haulers at a Suncor oil sands mine. Suncor is one of many energy firms reporting this week.
The energy prices baked into the valuations of Canada's large integrated oil and gas producers suggest that investors are quite bullish about the prospects for oil and gas prices.
According to an analysis by RBC Dominion Securities, the current valuations of the country's integrated energy producers, such as Suncor Energy and Canadian Natural Resources, assume a price of $76 per barrel of oil equivalent which caps off a long march higher over the past year and a half.
To determine these implied prices, RBC calculates a weighted energy priced skewed 75 per cent to West Texas Intermediate oil prices and 25 per cent to natural gas prices, which approximates the general mix of the commodities that these big companies produce. Though the exact breakdown differs for each company – Suncor, for instance, produced 92 per cent oil and liquids last year, and 8 per cent gas – the metric at least offers a rough gauge of what the market assumes.
The current implied price of $76 per barrel of oil equivalent is far higher than the trough price of $61 per barrel near the end of 2011, and closing in on the post-crisis peak of $84 per barrel set in early 2011, right before the S&P/TSX Composite Index took a rather large tumble.
There's good reason for investors to bake in better energy prices in the past little while. Despite all the negative remarks about natural gas prices, they've actually climbed quite steadily in the past few months, from their NYMEX low of just under $2 per million British thermal units to over $4 today, and the recent discount on Canadian crude relative to other North American oil is now down to under $20 per barrel from from $40 just a few months ago.
However, analyst Greg Pardy at RBC notes that since 2009 the market prices have, on average, been about $2 higher than the implied prices. Currently, implied prices are about $4 per barrel of oil equivalent above where they trade in the market, which suggests there may be reason to sell.
(Tim Kiladze is a Globe and Mail Reporter.)
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Tim Kiladze