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Canadian Oil Companies Well Priced After Events In Middle East

Posted on September 23, 2019 by Dylan Callaghan

Disclaimer: The writer of this article may have positions in securities listed below. Stocktrades may also be compensated via affiliate links in the post below

I would wager that most people looking at Canadian stocks have been avoiding the oil biz for the last while out of fear. The decline since 2014 has sent the industry into a whirlwind of lower lows and companies continue to drop off the major exchanges.

As the saying goes though, it pays to be in the market when others run in fear. This is especially true when we are talking about a commodity such as oil.

When I was first starting to learn how to buy Canadian stocks, I scooped up a lot of oil companies. After all, they’re some of the largest in the country and Canada is resource rich, it seemed like a no brainer.

Whether you like it or not, our dependance on the product is immense.

Oil is not new.

Even with great advancements in more sustainable energy oil won’t be going anywhere any time soon.

It could be worth picking up a few well positioned companies while the industry as a whole is in a slump and waiting for a rally, much like the drone strike that wiped out 50% of Saudi Arabia’s production.

Now, everyone is watching oil closely to see how global inventories are going to be affected, how this will impact the price of oil, and in turn the share prices of our Canadian producers.

How high will the jump be, and how long will it last?

The attacks on Saudi Arabia’s oil facilities certainly created a gap. The amount of production lost was roughly as much as Canada produces as a whole.

Will there be more attacks? Possibly.

If you can sneak attack a nation’s most valuable resource and cut them at the knees, I would venture to say that blatant weakness may potentially be exploited further. It is also possible some form of conflict ensues between the two parties involved in the incident or other politically connected nations.

A few factors in play…

Cheap labor is no scarcity in the Middle East and they will most likely be able to bounce back from the incident, potentially within weeks.

The life-span of the oil attacks in the Middle East could be short lived if it settles down quickly.

Simultaneously the Northern Hemisphere countries are coming up on the next winter in a hurry, and this means more oil consumption.

Due to these attacks in the Middle East reserves will be slightly lower going into our highest demand time of the year.

The construction of the Trans-Mountain pipeline no doubt will help out Canadian mid-stream companies, and create support for investment in the industry.

Finally as we all know, election time is upon us in Canada and the results could have big impacts on our oil industry. Some companies such as Imperial Oil have shelved new projects and are waiting to see how the election plays out.

In my mind a Conservative minority probably wouldn’t be much different than what we have right now. But the lower oil inventories due to the cut in Saudi production plus a higher demand coming up for the next several months could have the price of oil floating a little higher. This means Canadian oil producers may breath a little easier, seeing a rise in value depending on how they are individually priced going into the end of 2019.

Randy Ollenberger, managing director of oil and gas equity research at BMO Capital Markets said in an interview

“…stocks that were cheap before just got cheaper.”

and that the stocks that look the most attractive right now would include Cenovus(who recently increased their dividend) (TSX:CVE), Encana (TSX:ECA), Suncor (TSX:SU), Kelt (TSX:KEL), and Crescent Point (TSX:CPG).

Dylan Callaghan

About the author

Dylan is the co-founder of Stocktrades.ca and an avid self-directed investor. He holds a portfolio of Canadian growth and dividend growth stocks, and believes that anyone, regardless of financial status, stands to benefit from investing in the stock market. His ultimate goal with his writing and the continual development of Stocktrades.ca is to create a resource that helps Canadians, and investors from around the world, make more money and retire earlier.