Attack the biggest 'energy geopolitical event in modern history'

Portfolio manager believes value of Canadian supply went up meaningful and that equity valuations will reflect this

Attack the biggest 'energy geopolitical event in modern history'

The attack on an oil processing facility in Saudi Arabia is the largest and most significant energy geopolitical event in modern history, according to a portfolio manager.

Investors have been warned not to dismiss the attack as a short-term “sell the news” type event by Eric Nuttall, partner at Ninepoint Partners, who said that the value of Canadian production and security of supply just went up “meaningfully”, and that equity valuations will reflect this. He believes the past weekend represented a turning point in sentiment for the energy sector.

The ramifications are, though, still unfolding after the Abqaiq oil procession facility and the Khurais oil field were hit by either explosive-laden drones or cruise missiles. It’s meant the Saudi Arabian production capacity fell by about 5MM bbl/d, which is 5% of the world’s oil supply. In the medium-term, Nuttall said this seismic news event should make investors care about oil again.

“The energy sector had fallen to near irrelevant index weightings … 4.4% weight in the S&P500 and around 15% in the TSX,” he said. “We will see significant momentum buying [yesterday] along with short covering that will propel stocks significantly higher.

“It is very possible that this positive momentum will beget more momentum which will set off the ‘fear of missing out’ in the generalist investor community which does not own energy. This sector is extremely under owned.

“There will be no liquidity at the open and names will gap up as what was a buyers’ strike will turn into a sellers’ strike.”

There is also, of course, tweets from the President of the United States to factor in. Nuttall added that the fact Trump had expedited approval of all pipelines in queue should bode well for Line 3 and Keystone XL because the weekend showed that even the holder of the majority of the world’s spare capacity is not immune to supply disruptions.

Nuttall explained: “With US shale growth rates on the decline, this new paradigm on Saudi Arabia should meaningfully improve the strategic importance of Canadian supply to the United States. This has important read-throughs not just on the likelihood of infrastructure approvals but also on the valuation that one places on oil sand companies, which are still trading at their lowest valuation levels in history.”

In the short-term, he said the increases in oil prices with 5% of global supply offline looks like an under-reaction. And while the Saudis have adequate inventories around the world to cover themselves, the barrels will still have to be replaced at some point, serving to further tighten the oil market.

He said: “Energy is very, very underowned. Money has been hiding in Suncor and CNQ. No one owns Canadian midcap oil stocks - other than us - and the valuations are incredibly compelling. We were already seeing positive divergence last week where names were beginning to rally despite oil falling. Today [yesterday] will be napalm to that trend.

“This event will also ignite quant buying - 20% of AUM in the US - which will ignite ‘fear of missing out’ and bring generalist money off the sidelines – critical! We own strategic positions in meaningfully undervalued midcap energy stocks which people will [now] be tripping over themselves to try to buy. We are not sellers. We view this weekend as an important turning point in sentiment.”