Investors may want to steer clear of oil sands developers and coal producers and buy royalty stocks and companies with assets outside Alberta.
That’s the advice of portfolio managers and analysts after energy stocks declined Wednesday following the surprise election victory by the New Democratic Party in Alberta.
An index of Canadian energy companies plunged the most in three months after the win by Rachel Notley’s NDP, which has pledged to boost corporate taxes, review the government’s royalty rates for energy producers and phase out coal power.
Canadian Oil Sands Ltd. is among the most exposed to a potential hike in royalties and stricter environmental policies, while electricity supplier TransAlta Corp. would suffer from the new government’s vow to shut coal plants sooner than planned, according to analysts at BMO Nesbitt Burns and RBC Dominion Securities.
“Oil sands to me is public enemy No. 1 in the new premier-elect’s mind,” said Eric Nuttall, a Toronto-based fund manager focused on energy at Sprott Asset Management LP. “The investment thesis in all of those stocks evaporated overnight.”
Calgary-based Canadian Oil Sands dropped 6.4 percent on Wednesday, the biggest decline in almost two months. Other oil sands operators also fell, including Cenovus Energy Inc., down 6 percent, and Meg Energy Corp., off 8.1 percent. TransAlta declined 3.8 percent, its biggest drop since November.
Next, favor producers and drillers that operate outside Alberta, analysts said. Nuttall bought shares Wednesday of Crescent Point Energy Corp., the largest producer in Saskatchewan. Crescent Point was little changed, compared with a 2.5 percent decline in the main energy index.
Crescent Point, Crew Energy Inc., Leucrotta Exploration Inc. and Raging River Exploration Inc. are among producers with less than 20 percent of their output in Alberta, Dundee Capital Markets analysts led by Brian Kristjansen wrote in a note. Computer Modelling Group Ltd., ShawCor Ltd. and Enerflex Ltd. are all oilfield services companies that generate most of their revenue outside Alberta, according to Michael Mazar at BMO.
Also, look at energy investment companies that generate revenue from producers drilling on their land, such as PrairieSky Royalty Ltd., according to Dundee. They’re the likely beneficiaries of moves by producers away from drilling on government-owned land as the industry prepares for higher levies from the province. PrairieSky was up 2.8 percent while Freehold Royalties Ltd., an investment company with some holdings exposed to a royalty hike, was down 2 percent.
Advice is split on owning stocks of companies that transport and process fuels in Alberta. Analysts at Raymond James Ltd. argue stocks like pipeline builder TransCanada Corp. aren’t directly exposed to reduced investment in the sector while RBC advises to sell pipeline and so-called midstream companies with operations in Alberta. TransCanada dipped 2.4 percent, the largest drop since January. Enbridge Inc. also fell.
Analysts are also conflicted about how much producers with oil refineries, such as Imperial Oil Ltd. and Suncor Energy Inc., could offset losses from potentially higher royalties by boosting processing of crude in Alberta, a move the pro-labor NDP had pledged to support. Suncor, Canada’s largest energy company, had its biggest decline in three months.
One of the best ways to prepare for the uncertainty of a political sea change in Alberta is to own a bit of everything, said Ryan Bushell, a fund manager at Leon Frazer & Associates in Toronto.
“All bets are off” on the energy sector as investors try to gauge exactly what policies Notley will enact, Bushell said. “We always try to be diversified as a rule.”
Failing all else, the best refuge to escape any further carnage for Canadian energy stocks is to hide in cash.
“I was 74 percent cash heading into yesterday’s vote,” Nuttall said. “I think we have a few more days of pain. There’s going to be capital exodus from American investors.”