Why current oil prices don’t tell the energy sector’s whole fortune

Canadian Natural Resources Ltd., Suncor Energy Inc. and other names in the benchmark Canadian energy index are still trading at a lofty 65x forecasted fourth-quarter earnings.

Investors in the Canadian energy sector have certainly felt the pain of plunging oil prices, because the S&P/TSX Energy Index is down a lot more than 25% since June 2014, however, many say things might be worse.

'At $30 crude, something has to give:' Why Canadian oil stocks have been in for a reality check


Canadian energy information mill trading at record valuations, signalling their shares haven\’t swept up to the reality of crude oil\’s continued decline

Oil has fallen roughly 60% during the same period, after peaking near US$107 per barrel, yet Canadian Natural Resources Ltd., Suncor Energy Inc. and other names in the benchmark Canadian energy index are still trading in a lofty 65x forecasted fourth-quarter earnings.

That level, Bloomberg reports, is at an all-time high and more than double the average of their U.S. counterparts. One analyst said the sector is reflecting oil prices nearer to US$60, while another considers Canadian energy stocks overvalued if prices don’t climb above US$70.

But don’t dump your energy stocks (should you still have any) just yet, because comparing equity prices to spot crude isn’t the only real metric that matters.

Menno Hulshof, an energy analyst at TD Securities, said the main focus on spot WTI oil prices to measure the relative performance from the Canadian energy index is misguided.

He considers the relative performance from the index versus oil futures a far more appropriate measure, because it better aligns oil price expectations with reserves, which is a key factor for the long-life nature of numerous energy assets in Canada, particularly the oil sands.

“Even though the relative performance of spot WTI oil prices and the index is a logical starting point, it clearly does not tell the full story,” Mr.?Hulshof said.

Although the energy index is outperforming oil with a healthy margin, it has declined as much as the 12-month forward oil price curve, and 18% a lot more than the 36-month forward curve. Clearly Canadian E&Ps haven’t been as resilient as many think when confronted with collapsing oil prices.

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