Bay Street wary of next week’s energy earnings, Toronto traffic may signal hope

Bay Street money managers say the return of blaring car horns to downtown Toronto streets is a good sign for Canada’s troubled oilpatch.

The anecdotal uptick in driving, and crude stabilizing near US$40 per barrel, are among the positives they see as companies prepare to report financial results for a quarter that saw a global pandemic add to longstanding headwinds for the sector.

Suncor Energy (SU.TO)(SU) will be the first of the big Canadian oil and gas firms to report second quarter results on Wednesday. Suncor and its Calgary-based peers will account for three months where the North American crude benchmark briefly turned negative for the first time, the OPEC-plus group scrambled to address global oversupply, and COVID-19 erased transportation demand as the world stayed at home.

Collapsing crude prices in the first half of 2020 saw Canadian energy companies wipe out more than $8 billion in capital spending plans, halt payouts to shareholders, slash workforces, shutter production and shelve green-focused projects.

West Texas Intermediate averaged US$27.85 per barrel during the second quarter for many in the energy patch, down from nearly US$59.82 a year ago. Prices have recovered into the US$40 range in recent weeks, holding firm even as OPEC-plus members agreed to taper the 9.7 million barrel-per-day production cut in place since the spring.

“Prices have come back a lot, but for many producers it’s still only marginally profitable, if at all, to be pumping oil right now in Canada,” said Norman Levine, managing director at Toronto-based investment firm Portfolio Management Corp. “I don’t have a lot of high expectations going into next week.”

Levine said he’s pared his Canadian energy holdings for clients down to two stocks as the S&P/TSX Composite Index shifted its weighting away from energy in recent years. He said Suncor and Cenovus Energy (CVE.TO)(CVE) each stand to benefit from their refining businesses once demand for gasoline and jet fuel normalizes.

“I can sleep well owning both of those,” he said. “Suncor is the safest Canadian energy stock from a balance sheet point of view. Cenovus used to be a lot more leveraged than it is now, and it’s brought that leverage down a lot.”

Greg Taylor, chief investment officer at Purpose Investments, is more optimistic. He’s calling for quarter-over-quarter improvements due to the narrowing discount on heavy Canadian crude compared to lighter WTI in recent months.

What’s less clear, he said, is how share prices will reflect company efforts to control costs, shore up balance sheets, and manage expectations around navigating the still-depressed commodity environment.

“Companies that say, ‘We think this is temporary and we are going to keep drilling and keep growing,’ that will be looked at as a negative,” said Taylor. “Investors in this sector are looking for capital preservation.”

Darren Sissons, a portfolio manager at the Toronto private wealth firm Campbell, Lee & Ross Investment Management, is anticipating three full months of COVID-inflicted damage will result in severely depressed earnings. He said people staying at home during the quarter will be largely to blame.

However, he points to recently reported sales of millions of barrels of crude and oil products stored in tankers at sea during the pandemic as evidence of fuel demand rebounding.

He sees signs closer to home as well.

“You’re starting to see gridlock occurring in Toronto. The time to get to various locations is increasing a couple minutes per day, everyday,” he said in a phone interview while taking a break from driving through Ontario’s cottage country.

“Pricing is very much done by the hedging books. But if you start looking at fundamental demand, each month is getting better.”

Christopher Blumas, vice president and portfolio manager at GlobeInvest Capital Management, has also noted more cars on Toronto streets in recent weeks.

While gasoline demand appears to be improving, his main concern is oil’s ability to stay above US$40 per barrel as low cost producers like Saudi Arabia and Russia come under pressure to lift their domestic economies from the COVID slump by pumping more oil.

“There is going to be more and more incentive to pump more and break those quotas,” he said. “Prices have come up, but everybody’s budgets are feeling the strain.”

On top of the global pandemic and weak commodity prices, all four money managers said Canadian-made problems, chiefly the lack of pipelines to deliver Alberta oil to global markets, will hold back the sector for the foreseeable future.

“There are powerful macro trends that these companies are trying to deal with like more demand for renewable resources and lack of takeaway capacity,” Blumas said. “Those things aren’t going to change quarter-over-quarter.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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