Oil Seen Driving Canada Profits to Best Gain in 3 Years

Canadian stocks are poised for their biggest jump in earnings in three years in 2014 as rising global growth boosts energy producers such as Suncor Energy Inc. (SU)

The Standard & Poor’s/TSX Composite Index (SPTSX) will produce C$946.55 ($889.61) a share of profit in 2014, a 13 percent gain over projected 2013 levels, according to estimates compiled by Bloomberg. That’s the biggest year-over-year advance since a 22 percent rise in 2011 and will help lift Canada’s main equity gauge 2.9 percent in 2014, according to strategists’ forecasts, following this year’s 9.2 percent increase.

Global growth, forecast to accelerate by almost a full percentage point to 2.8 percent next year, will increase demand for commodities and bolster resources companies which make up 36 percent of the S&P/TSX, according to analysts such as Stefane Marion at National Bank Financial.

“We do believe in 2014 we will have a return to earnings growth, and the performance of the index in Canada will be closer to the rest of the world,” Marion, chief economist and strategist of the Montreal-based bank, said by phone on Dec. 23. “We’re overweight the energy sector and it’s a big component of the TSX. That’s where you’re going to make it or lose it.”

The S&P/TSX’s estimated 2.9 percent gain would leave the index at 13,979 at the end of 2014, the average forecast of six strategists surveyed by Bloomberg. The S&P 500 is projected to advance 5.7 percent by the end of next year, according to the average estimate, leaving the spread between the two gauges at 2.8 percentage points, the narrowest since 2010.

Pipeline Clarity

National Bank has the highest 2014 year-end forecast for the S&P/TSX at 14,400 and made the second-most accurate strategist prediction this past year, according to data compiled by Bloomberg. The S&P/TSX was the fourth-worst performing equity gauge among developed markets this year, beating Austria, Hong Kong and Singapore while trailing the S&P 500’s 29 percent gain.

Energy shares should get a boost amid greater clarity on pending pipeline projects, Marion said. TransCanada Corp. (TRP) Chief Executive Officer Russ Girling said Dec. 19 he expects the U.S. State Department to release an environmental report on the company’s $5.4 billion Keystone XL pipeline that would link Alberta’s oil sands with the U.S. Gulf Coast in “weeks, not months” with a final decision by the end of March.

Pipeline bottlenecks have contributed to a $23.50 discount on Canadian heavy crude compared with its U.S. peer as of Dec. 30. Construction of Keystone, along with other projects including Enbridge Inc. (ENB)’s proposed Northern Gateway conduit and expansion of an existing pipeline from Alberta to Wisconsin, may help lift oil prices for Canadian producers.

Production Boost

“From a geopolitical standpoint it makes a lot of sense for the U.S. to accept Keystone so I’m relatively optimistic,” Marion said. “Keystone is one we can execute relatively quickly and it sends the message that Canadian oil is going to the U.S. and it would be a boost to valuations.”

The S&P/TSX Energy Index gained 9.4 percent in 2013, the fourth-worst performer among 10 industries in the S&P/TSX. Earnings among energy producers are expected to jump 19 percent to C$169.32 a share in 2014, the biggest gain since 2011, the data show.

Canadian oil producers are boosting their production levels in 2014. Suncor said Nov. 20 it forecasts a 10 percent production increase in oil next year. Canadian Natural Resources Ltd projects a 7 percent jump in 2014 oil and gas production from current levels.

‘Very Negative’

Vincent Delisle, managing director of the portfolio strategy group at Scotia Capital Markets, said equity markets surged in 2013 as investors regained confidence in stocks. Growth in 2014 will depend on rising earnings.

“We feel more comfortable about the earnings outlook,” Delisle said in an interview in Toronto on Dec. 10. “It has bottomed and we see some upside there.”

Canada has lagged the U.S. market for three straight years, dragged down in 2013 largely by a slump in raw-materials prices including declines in gold, copper and silver. The S&P/TSX Materials Index fell 32 percent in 2013 and has plunged 50 percent in the past three years.

Air Stocks

“I’m very negative on the actual TSX, because it’s very heavy into a sector you don’t want to be in and that’s gold,” Barry Schwartz, fund manager with Baskin Financial Services, said in a Dec. 12 phone interview. His firm manages about C$600 million. “I’m positive on banks, financial services, pipelines, retail, telecom, basically any companies that have nothing to do with resources or base metals.”

Schwartz highlighted National Bank of Canada (NA) as a financial services company that has posted positive earnings while also maintaining an attractive 4 percent dividend yield.

Keith Richards, fund manager with ValueTrend Wealth Management in Barrie, Ontario, said investors should rotate out of traditional, large-cap resource names altogether and hunt for break-out candidates in other industries.

Richards bought CAE Inc. (CAE), the aircraft simulator company, on Oct. 2 and the stock has surged 19 percent since as it signed contracts to sell flight simulators, training devices and services and boosted its dividend.

“It’s a bet on the entire airline industry,” Richards said. “CAE was stuck at C$11 for a long time when we bought it and then it broke out. People have been paying so much attention to the Suncors of the world that you miss these gems.”

Needs Pullback

Sadiq S. Adatia, chief investment officer with Sun Life Global Investments Inc. in Toronto, said he forecasts the S&P/TSX will be either flat or slip 3 percent in 2014. It could slump as much as 10 percent next year in a “worst-case scenario” that includes a plunge in Canadian real estate prices, a downturn in the U.S. economy and a fall in commodities prices.

“Canada needs a pullback,” Adatia said. His firm manages C$6.4 billion. “Canada needs to get over it, have that decline before a rebound back.”

As for Air Canada (AC/B), the best-performing stock in the S&P/TSX in 2013 with a 327 percent gain, analysts see a further advance. Canada’s largest airline is forecast to jump 16 percent to C$8.67 from current levels, according to the consensus of projections from 12 analysts surveyed by Bloomberg.

To contact the reporter on this story: Eric Lam in Toronto at elam87@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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