The Canadian energy sector is sinking to unprecedented depths, as an exodus of investors and foreign companies from the oil patch gathers momentum.
With the sector’s downslide now effectively five years running, several exploration and production (E&P) companies have recently seen their stocks dislodge from crude oil prices and sink to record lows.
“It’s just been a bloodbath, especially this year,” said Christopher Blumas, vice-president at GlobeInvest Capital Management Inc. in Toronto. “There’s only so much pain people can take before they have to cut their losses.”
There’s little in sight to break the fall. Without meaningful progress on expanding pipeline capacity, oil and gas stocks could continue be “dead money” for years, Mr. Blumas said.
Since 2014, the index comprising Canadian oil and gas exploration and production companies has declined by 73 per cent.
The global oil market is behind much of that downslide. An excess supply crushed crude prices starting in 2014, as a barrel of West Texas Intermediate (WTI) fell from a high of US$107 all the way down to US$26.
The oil patch was forced to remake itself, cutting costs, reducing debt and consolidating. And WTI, while far from its former heights, is well off its lows at about US$55 a barrel.
But energy equities in Canada have yet to turn the corner.
The list of E&Ps hitting record-low share prices just this week includes Arc Resources Ltd., Baytex Energy Corp., Torc Oil and Gas Ltd., Kelt Exploration Ltd., Nuvista Energy Ltd., Athabasca Oil Corp. and Pengrowth Energy Corp.
Integrated oil companies Imperial Oil Ltd. and Husky Energy Inc. are trading at their lowest since 2008 and 2003, respectively.
The continued share price decline in 2019 has occurred despite a 20-per-cent rise in crude oil benchmarks since the start of the year. The gap between Canadian energy stocks and oil prices, based on the ratio of the S&P/TSX Capped Energy Index to WTI, has now widened to its largest ever, according to Bloomberg.
That’s one sign the Canadian energy market is “broken,” said Eric Nuttall, senior portfolio manager at Ninepoint Partners.
The problem is that there are just so few buyers of energy stocks, he said. Five years of losses have stifled the buy side’s appetite for the sector.
About 10 years ago, the energy sector accounted for nearly one-third of the S&P/TSX Composite Index’s total market capitalization.
That weighting has since halved, to around 16 per cent.
Fund managers do not appear comfortable affording the energy sector even that diminished level of influence.
The average energy-sector exposure across Canadian equity mutual funds was about 14.5 per cent as of the end of June, Craig Basinger, chief investment officer at Richardson GMP, said in a report.
“Clearly, institutional money managers are not chomping at the bit, despite what appear to be attractive valuations,” he said.
On a price-to-cash flow basis, Canadian E&Ps are trading at a 30-per-cent discount to their U.S. counterparts, which are struggling in their own right, Mr. Basinger said.
Investor apathy toward the oil patch has extended beyond Canadian institutional investors.
A conglomerate owned by U.S. billionaires Charles and David Koch recently sold its oil sands assets, the latest in a string of divestitures by foreign companies such as ConocoPhillips and Royal Dutch Shell PLC.
“You've seen large, global, integrated players who, over the last two to three years, have sold their assets at pretty low prices, just to move on,” Mr. Blumas said. “They find it better to allocate the capital elsewhere.”
Private equity investors, meanwhile, do not appear to have flocked to undervalued oil patch assets as they have in past energy slumps.
“The multiple compression that’s happened over the last couple of years has scared off an awful lot of outside capital,” said Dane Gregoris, senior vice-president at Calgary-based research firm RS Energy Group.
Though pipeline constraints have weighed heavily on valuations, there are several other external forces bearing down on Canadian E&Ps.
Global oil demand has softened, while rising inventories have weighed on crude prices.
And investor preferences have recently shifted in favour of defensive sectors, as the global economy has increasingly flashed warning signs of a recession.
“If things don’t hold up from a macro perspective, commodities and energy could be in an even worse spot longer term,” Mr. Blumas said.