Yesterday, a client-friend and I, attended National Bank's 7th Annual Energy Conference in Toronto. We sat in on two panel presentations, one on oil and one on gas, and then two 1-1 meetings with the respective CEO's and CFO's of the two companies. These types of conferences, but especially the 1-1 meetings, are an incredibly important part of the fundamental research I do here at High Rock. It gives us a chance to ask more pointed questions about parts of their business.
Given it is Friday, I think I will throw in some humour on this topic. Back in about 2002, when I was at MER, we hosted a similar Energy Conference in Calgary where we invited Institutional Accounts (big pension funds, life cos and asset management firms, like High Rock) to the event to meet with company management teams. I remember sitting at a dinner beside some CEO from an oil producing company and the conversation centered around personal investments. When it was suggested that the CEO think of diversifying his personal wealth a little bit from 100% of it sitting in the stock of his oil company, he said, "son, around here, if I want diversification from oil, I'll just go and buy a natural gas producer". True story. Calgary is a town of hard-a$$ gamblers.
Anyway, a few themes came up yesterday, one which I will share with you.
Canadian Exploration and Production (E+P) Oil/Gas company stocks have been getting hammered the past month, even as oil (WTI) has been going up.
Chart first. Here is the Blackrock iShares XEG which is an Exchange Traded Fund (ETF) filled with Canadian E+P (mostly) companies vs the price of oil in North America (WTI). SU, CNQ and ECA represent about 50% of the entire ETF. XEG is the white line and WTI is the orange line. This chart goes back over the last 6 months but note the gap over the past month of January?
XEG is basically trading where it was in mid-November, which was before OPEC did it's thing Nov 30th and WTI was trading at $46. Today, WTI is at $53.50.
What gives? After yesterday, I think there are three possible reasons why this gap has opened up:
I think there are some specific opportunities out there because of this gap that has opened up over the past month but we need to move with a note of caution. Standing in front of a freight train (the large seller) can be tricky because, we never know when he/she is done.