Curious decoupling boosts Canadian energy firms

With Bank of Canada's waning vigour on rate hikes, energy producers getting an extra lift

Curious decoupling boosts Canadian energy firms

by Geoffrey Morgan

An unusual decoupling between the Canadian dollar and the price of oil could prove to be a boon for the nation’s energy producers.

The loonie and the price of oil are often closely correlated, with rising oil translating to a stronger Canadian dollar, because energy is the nation’s biggest export. But recently oil has been rising and the Canadian dollar has been getting weaker, as the country’s central bank has been less aggressive about hiking rates. 

The price of oil is tied to US dollars, so Canadian energy producers are benefitting from rising energy prices now, but they are getting an extra boost from translating those prices back into a home currency that is weaker compared with the greenback. NinePoint Partners senior portfolio manager Eric Nuttall anticipates upward cash flow revisions for Calgary-based oil and gas producers, who are close to debt-repayment targets and are significantly boosting shareholder returns.

“What you want is a business that has its revenues in US dollars but pays its costs in Canadian dollars, and that’s what you get with a Canadian oil company — at the same time you also get the longest reserve life in the world with the lowest decline rates in the world,” he said by phone.

Nuttall’s fund has picked Baytex Energy Corp., MEG Energy Corp. and Cenovus Energy Inc. as likely to boost shareholder payouts and lead the group higher. “Share price performance is driven by who pays us the most, the soonest,” he said.

Local performance of energy shares may reflect the effects of decoupling. The S&P/TSX Composite Energy Index climbed 4.1% year to date through Thursday’s close in Canadian dollar terms, faring slightly better than its US counterpart, the S&P 500 Energy Index, which is up 3.3% over the same period in US dollar terms.

On both sides of the border, oil companies have rallied as the price of West Texas Intermediate has climbed above $87 a barrel in the futures market — a sharp rebound from about $68 a barrel in mid-June. Meanwhile, a Canadian dollar now fetches around 73 cents in the US, down from around 76 cents as recently as the middle of July.

The Canadian dollar is being affected by the spread between yields in Canada and the US, which has widened as the Federal Reserve has hiked interest rates more than the Bank of Canada has, said Brooke Thackray, a research analyst for the Horizons Seasonal Rotation ETF.

As a result, Thackray said, “You’re getting a double boost for the energy sector here.”

RBC Capital Markets commodity strategist Michael Tran sees WTI oil prices averaging $86.50 a barrel in the final quarter of this year, adding the “physical market is the healthiest it has been in 12 months.”

Analysts on Bay Street in Toronto have a more positive view of the S&P/TSX Energy Index, which is expected to rise by about 12% over the next 12 months, than Wall Street has of the S&P 500 Energy Index, which is expected to rise by around 8%.

“Right now, the environment does favor the Canadian energy producers,” Thackray said.

 

Copyright Bloomberg News

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