Canada’s Cheapest Oil Stocks in 2 Years Lure Investors

John Clark has watched his holdings such as Birchcliff Energy Ltd. and Canadian Natural Resources Ltd. plunge more than 19 percent in the past month. Now he’s thinking of buying more shares.

Canadian oil and natural gas producers have fallen for the past 10 days, a losing streak not seen in almost two decades, on concern that supplies are overwhelming demand as growth slows in China and Europe. The retreat has left the industry at the lowest valuation since 2012 -- a level that Clark, president of Pacific Spirit Investment Management Inc., said is too cheap to pass up.

“Each day the market pulls back, we see more and more incredible opportunities in the market,” Clark said in a phone interview from Vancouver. His firm manages about C$140 million ($123.9 million). “When we see a great company at a good price we’ll step in and buy it rather than try to time the market bottom.”

Energy stocks are suffering the worst losses in a market retreat that’s erased about C$227 billion from the value of Canadian stocks since Sept. 3. Canada, once one of the world’s best-performing markets earlier this year, completed a 10 percent drop from its record yesterday, entering what’s commonly called a correction.

Oil Plunges

Oil producers, explorers and equipment providers in the S&P/TSX sank 4 percent yesterday, the biggest drop since June 2012, as crude prices plunged. Brent oil tumbled yesterday to the lowest level in almost four years and West Texas Intermediate crude sank the most since 2012 after the International Energy Agency said oil demand will expand this year at the slowest pace since 2009.

“Perhaps moving gingerly at first, investors would do well to begin to lean back into equities, including cyclically levered energy stocks,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto, in a note to clients today.

Conditions are set to improve on both the supply and demand sides, Shenfeld said, as policy makers still have room to ease fiscal policy and the world’s largest oil producing countries may adjust supply levels.

Shares of Canadian energy companies trade at 21.1 times earnings, the lowest level since December 2012 and down from almost 30 at the end of March, data compiled by Bloomberg show.

Bear Markets

Crude prices in London and New York have collapsed into bear markets in the past week, forced lower by weakening demand in China and shale supplies boosting U.S. output to the most in almost 30 years. WTI for November delivery dropped $3.90 to $81.84 a barrel yesterday, the lowest settlement since June 28, 2012.

Cheap valuations won’t offer much support if oil keeps tumbling, said Chris Theal, chief executive officer at Kootenay Capital Management Corp. WTI crude is down about 17 percent in 2014.

Oil consumption will rise by about 650,000 barrels a day this year, 250,000 fewer than the prior estimate, the IEA said yesterday. The Paris-based agency reduced its estimate for demand growth this year for the fourth month in a row, meaning oil consumption will expand by about half the rate of 1.3 million barrels a day anticipated in June.

Raising Cash

“Multiples come secondary to the oil price at the end of the day,” Theal said in a phone interview from Calgary. His firm manages about C$30 million. “You can only dip your toes in so many times finding lower lows. We just raised cash today, so not in the market as a buyer.”

Suncor Energy Inc. and Canadian Natural Resources are attractive after the shares dropped at least 23 percent from their highs this year, according to Monika Skiba, a fund manager at Manulife Asset Management Ltd. in Toronto. The firm manages $281 billion. She pointed to the companies’ “solid” management and production growth as evidence the stocks are a good buy.

Suncor, Canada’s largest oil producer, trades at 10.9 times reported profit, the lowest level in a year, data compiled by Bloomberg show. Canadian Natural Resources has a multiple of 12.3, a two-year low.

“While it looks like you’re trying to catch a falling knife, the value is out there,” said Irwin Michael, fund manager at ABC Funds in Toronto. His firm manages about C$900 million. “If you look back six months or a year from now, trades made today would do quite well.”

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