American investors are ramping up their bets against energy stocks, while short interest on their Canadian-listed counterparts has been waning.
The discrepancy speaks to the yawning difference in sentiment between the two countries: While Americans are growing more bearish on energy stocks, Canadians are increasingly sanguine.
Rich Barry, floor governor at the New York Stock Exchange, recently wrote that short-selling energy stocks has become "a hugely crowded trade" south of the border.
The average stock in the S&P Energy index has seen short interest as a percentage of tradable shares rise from just shy of 4 per cent in June, 2014 – when the price of oil was in the first inning of its collapse – to nearly 6 per cent at the start of February.
Meanwhile, the average stock in the S&P/TSX Energy index has seen short interest as a percentage of tradable shares slip from 3.5 per cent to 3.1 per cent over the same period.
Domestic investors have good reason to be more optimistic about the sector's prospects than their neighbours to the south. The decline in the Canadian dollar helps pad the profits of domestic oil producers, although the large amount of U.S.-denominated debt held by some, such as Cenovus Energy Inc., modestly offsets this positive effect. In addition, most experts believe that the brunt of production cuts will be borne by the shale producers in the United States rather than Canadian heavy oil producers.
However, the larger share of short interest on U.S. energy stocks suggests that these stocks may have more upside in the event of a rebound in the commodity price that prompts short-sellers to hurriedly fold up their bearish bets.
Jared Woodard, senior derivatives strategist at BGC Partners, noted that, on average, U.S. energy firms exceeded earnings per share estimates by more than 12 per cent during fourth-quarter earnings, albeit on severely reduced expectations.
Early into the S&P/TSX earnings season, the same cannot be said for energy companies headquartered north of the border. So far, however, poor quarterly results from the likes of integrated giants Suncor Energy Inc. and Cenovus Energy Inc. have done little to dent the confidence of Canadian investors or large institutions. Donald Guloien, chief executive officer of Manulife Financial Corp. said that the company is "trying to back up the truck to buy more oil and gas," while Canada Pension Plan Investment Board chief executive Mark Wiseman indicated that he sees "a lot of value in the Western Canadian basin."
The notion that West Texas intermediate crude has found a floor after trading above $50 a barrel (U.S.) for most of the month has left investors optimistic that the storm has passed. To many, tumbling rig counts and stripped-down capital budgets are signals that the market has reacted appropriately to lower prices and a drop-off in supply is imminent.
However, analysts at BMO Nesbitt Burns believe a retreat to about $40 a barrel will be necessary to bring about a decrease in supply, observing that energy companies in their coverage universe are targeting cumulative annual growth of more than 1 million barrels a day in 2015.
"We expect further downward adjustments to capital spending and production guidance in response to ongoing weakness in crude oil prices," said analysts Randy Ollenberger and Jared Dziuba. "That said, we also believe that current low oil prices are not sustainable over the medium to long term as the industry does not generate enough cash flow to maintain growth and balance sheets are becoming too stretched to rely on incremental debt funding."
If the two are right, domestic investors may want to wait for a better entry point before adding exposure to the space, especially since S&P/TSX composite energy equities have outperformed the commodity price by a substantial margin since their Dec. 15 low.