{"id":1513,"date":"2022-02-01T08:58:43","date_gmt":"2022-02-01T16:58:43","guid":{"rendered":"https:\/\/smallcapdiscoveries.com\/?p=1513"},"modified":"2022-02-01T08:58:43","modified_gmt":"2022-02-01T16:58:43","slug":"an-overlooked-oil-and-gas-play","status":"publish","type":"post","link":"https:\/\/smallcapdiscoveries.com\/articles\/an-overlooked-oil-and-gas-play\/","title":{"rendered":"An Overlooked Oil and Gas Play"},"content":{"rendered":"
While major Canadian oil and gas companies have enjoyed an overall robust stock price recovery since the COVID lows of 2020, ample investment opportunity remains if you look in the right places.<\/p>\n
In fact, once the dust settles and the world works its way through the current market volatility, it will become increasingly apparent that a certain segment of the oil and gas market presents considerable upside.<\/p>\n
As always, once this opportunity is known the chances for significant gains may be too late. So if you missed the recent oil run and want another stab at what may be a hot sector for 2022, there are several factors to understand . . .<\/p>\n
\u00a0<\/strong><\/p>\n Interest rates are going up.<\/p>\n By how much remains to be seen, of course, but there\u2019s no denying that the tightening cycle is upon us. The markets have been predictable in their response as they price this in, pulling the rug from under high-flying, overvalued tech stocks and sending the NASDAQ into correction territory.<\/p>\n The resulting fear and uncertainty has hit nearly every market segment, as the era of cheap money propping up speculation appears to be coming to an end.<\/p>\n But while this is hardly the end of speculation, it\u2019s likely the reemergence of value as the preferred market play. Cash is king in a rising rate environment and those who don\u2019t make any will soon find themselves at a growth disadvantage.<\/p>\n This means companies with strong business fundamentals and solid revenue are getting the spotlight in the emerging, more conservative era. Imagine that.<\/p>\n And one sector in particular is looking very strong.<\/p>\n \u00a0<\/strong><\/p>\n Despite headlines dominated by tech stocks, 2021 actually belonged to energy. With a 50% rebound in oil prices, energy went on to be the best sector in the S&P 500 Index and S&P\/TSX last year.<\/p>\n To be fair, fundamentals went out the window for most of the market, and oil was no exception\u2014snapping back from a ridiculous low that even saw West Texas Intermediate (WTI) price go negative (albeit very briefly) for the first time.<\/p>\n But the medium- and long-term reasons are economic recovery and simple supply and demand. Global population growth and increasing standards of living, combined with the current lack of oil alternatives, suggest that demand will be strong for some time.<\/p>\n The Canadian Association of Petroleum Producers echoes this, noting that investment in Canada\u2019s oil and gas industry will rise 22% this year<\/a> amid higher prices.<\/p>\n The International Energy Agency (IEA) also says oil demand will continue at around 100 million barrels per day for the next several years and remain at or above that level until 2040 and beyond.<\/p>\n And there\u2019s also the factor of undersupply. Rumours of dwindling supply from OPEC and Russia have to be considered. So does increased ESG requirements, which include regulatory hurdles that prevent new projects from coming online.<\/p>\n Eric Nuttall, manager of the $1 billion Ninepoint Energy Fund, believes the factors above mean that the recent success in energy will bring in more fund managers<\/a>, as Canada\u2019s energy producers use free cash flows from high prices to boost their values.<\/p>\n This, in turn, will lead to increased interest, first among institutions, and then retail as it becomes clear that oil is in a multi-year bull market.<\/p>\n In other words, FOMO may be about to run its course.<\/p>\n \u00a0<\/strong><\/p>\n The energy sector is flush with cash and more is on the way, with revenues expected to reach record levels this year if prices remain elevated, according to ARC Energy Research Institute<\/a>.<\/p>\n All that cash has to go somewhere, and for energy companies it often equates to paying down debt, share buybacks and dividends. However, what\u2019s different about this oil and gas boom, is how the battle scars from the last bust have impacted companies willingness to increase their exploration spend \u2013 and past investors continue to demand for their investment back.<\/p>\n But, as several Oil & Gas producers continue to generate strong cashflows, adding in the cushion of safety with the current oil price, many of these producers have drastically improved their balance sheets, some are as strong as ever. We believe it\u2019s inevitable before several of these companies start re-thinking the opportunity and begin increasing their exploration and development budgets \u2013 especially if oil prices rise.<\/p>\n It makes sense, given that large and medium-sized Canadian oil and gas companies are still undervalued. Recent data compiled by Bloomberg<\/a> shows that Canadian oil and gas companies trade well below their U.S. peers, at 16.11 times their earnings, compared to 21.49 times earnings.<\/p>\n So an investor could do worse than just placing money in the big players. However, all that cash and increased investment will also flow downstream to where the real opportunity lies.<\/p>\nA rotation is underway<\/strong><\/h3>\n
Energy\u2014a new safe space <\/strong><\/h3>\n
Money is pouring into oil<\/strong><\/h3>\n