An analysis of valuation, which has reached 2016-level lows.

Nicholas Lupick, CFA

With the recent unfavorable ruling by the Canadian Court of Appeals, which sent the Trans Mountain pipeline back for further consultation, a “risk off” trade has spurred a wave of indiscriminate selling of Canadian energy equities. As a result, the valuations of Canadian E&P and Integrated Producers have approached or breached the lows seen in early 2016, when a barrel of WTI crude was in the mid USD 20s. Bargains are beginning to appear.

Equities with International Exposure
For investors tired of Canadian regulatory uncertainty causing undo volatility in their investments, note that there are a number of Canadian E&Ps under our coverage with assets that produce commodities that receive international prices (including refined
products). We highlight Vermilion Energy, Encana, and Enerplus as the standout E&Ps because each originates more than 50% of EBITDA from non-WCSB assets.

Look to Canadian Integrated E&Ps for Defense
Investors concerned about the direction of oil prices and the possibility of wider-for-longer Canadian oil differentials should look to the Integrated E&Ps with refining assets. In a previous report, we highlighted in detail the profitability of Canadian Integrated E&Ps compared to US refiners. Those in the Great White North achieve ~2x more downstream EBITDA per barrel of refining capacity. Suncor Energy stands out among the group with its ability to generate the highest downstream EBITDA per bbl of throughput capacity.

E&Ps Approaching Bargain Territory
The recent sell-off in Canadian energy equities, propelled by fears that pipeline capacity constraints will last longer than previously expected, is not without cause. However, a number of free cash flow-generating entities with growth plans being progressed along have seen their equity prices approach or breach lows not seen since early 2016, when WTI prices were in
the mid-$20s. Companies under our coverage that have fit this profile include Baytex, Crescent Point, and Whitecap.

Heavy Oil…What Can We Say?
Recent PADD II refinery outages (at the same times Oil Sands production is growing) has resulted in differentials widening substantially — a phenomenon we expect to persist until mid- to late October. The portfolio diversification efforts by Canadian E&Ps in recent years has enabled some entities to be less exposed than investors may initially expect.