It may be a little early to be optimistic concerning the Canadian energy sector.
Much like in the U.S., Canadian oil and gas stocks have significantly diverged using their historical relationship with WTI, even when adjusting for the weaker Canadian dollar. And, as BMO Capital Markets chief investment strategist Brian Belski points out, the softer loonie has not insulated Canadian energy producers.
Since long-dated WTI futures are stuck below US$70 per barrel, he thinks the power sector is not likely to establish a sustainable rally.
“The slight rebound in crude oil prices and some signs of slowing production development in the U.S. have numerous investors excited about this sector again,” Belski told clients. “Unfortunately, from our perspective, fundamentals remain challenged.”
The strategist noted that?Institutional Brokers’ Estimate System estimates show analysts anticipate the S&P/TSX energy sector’s earnings per share to completely recover by 2017.
As an effect, he believes investors need to look well beyond that date to locate any meaningful value, as the sector is “already pricing in an exceedingly optimistic scenario,” since the forward three-year earnings multiple is roughly 19x, compared to a long-term average P/E of 14.5x.