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Investing in Cheap Canadian Energy

Written By Briton Ryle

Posted February 19, 2015

By now most are aware of how the falling crude oil price has brought down many an oil producer stock, extending to courageous investors a once-in-a-decade buying opportunity.

But did you know that the rout in oil prices has opened up an even GREATER opportunity in the energy sectors of other countries? It all stems from the changes to currency exchange rates caused by the plunging oil price.

Once the oil price finally begins to rebound in a few quarters – (not up to $100 per barrel again, of course, but some 20% to 30% from here, at least) – the turning tide will lift energy stock north of the border in Canada even more than it will those in the U.S., the added boost being provided by the accompanying rebound in the CAD:USD exchange rate.

Here’s how it works…

Canadian Energy Stocks Have Fallen More

Since crude oil reached its then one-year peak of $107.73 near the end of June, 2014, it had fallen as much as 59.55% to as low as $43.58 two weeks ago, rebounding only slightly since then up to $52.14 per barrel.

But the plunge in oil prices brought down more than just energy sector stocks; it also corroded the currencies of major oil exporting nations, since those countries would now be generating less revenue from the oil they export. As cases in point, since oil began falling in June of 2014, the Russian ruble has fallen some 45.81% from $0.02969 to $0.01609 USD per RUB, the Nigerian naira has fallen 18.68% from $0.00621 to $0.00505 USD per NGN, and the Canadian dollar has fallen 14.69% from $0.94043 to $0.80232 USD per CAD.

Combining the two forces together – a falling oil price with a falling currency – results in foreign energy stocks losing even more value than their U.S. counterparts. Let’s take three Canadian energy companies as examples: Suncor Energy Inc. (NYSE: SU), Imperial Oil Ltd. (NYSE: IMO), and Cenovus Energy Inc. (NYSE: CVE) – all of which are integrated oil and gas companies engaged in production, delivery and refining, with market caps of $45 billion, $34 billion, and $13 billion USD respectively.

As per the one-year graph below, our three Canadian energy stocks were leading the way very nicely as the oil price was climbing up to its recent high of $107.73 by late June of 2014. In fact, the three Canadians were not only beating the broader market S&P 500 [black], but were also beating Exxon Mobile (NYSE: XOM) [blue] and Chevron (NYSE: CVX) [beige] by as much as 10-20%.

Yet since then, the three Canadians have stumbled more than their American rivals. Where Exxon and Chevron are down only 3% over the past 12 months, the three Canadian energy companies are down from 8% to as much as 30%.

cheap energy stocks cafariello 1


Why the extra loss north of the border? Much has to do with a correlated drop in the Canadian dollar as it followed oil down as graphed below, given Canada’s place as the world’s tenth largest oil exporter. Just a rising oil price lifted the CAD up with it (green), so did a falling oil price drag the CAD down (red).

cheap energy stocks cafariello 2

Sources: /

Hence, the falling oil price acted as one heavy weight pushing Canadian energy stocks down, while the falling CAD acted as a second weight exerting additional downward force. This resulted in a great distorting of the companies’ stocks between their listings on the Toronto Stock Exchange (TSX) versus their listings on the New York Stock Exchange (NYSE). Let’s take just one example here using the largest Canadian energy company, Suncor, as graphed below.

In the build-up to the June peak, while both the price of oil and the CAD were rising in value, Suncor’s Canadian TSX-listed stock [black] rose more than its American NYSE-listed stock [beige]. As framed by the green box, the company’s Canadian stock enjoyed a hefty 6% premium over its American twin.

cheap energy stocks cafariello 3


Yet after crude oil’s tumble which brought the CAD down with it, Suncor’s stocks reverted positions. Where the company’s American stock is actually up 5% over the past 12 months, its Canadian twin is down 5%. As framed in the red box, the company’s Canadian stock is now trading at a discount of 10% under its American twin.

Canadian Energy Stocks “Should” Rise More

Since the combined downward pressure exerted by a tumbling oil price and a falling CAD resulted in greater downward moves by Canadian energy stocks, we would reasonably expect, then, for the reverse to take place when energy prices finally rebound.

Of course, oil prices will likely continue to remain suppressed for some time, and even when they do rebound they will likely not reach anywhere near their recent $100 level, but will likely remain confined to a $50-$70 range. But however small the lift in the oil price, it will be accompanied by a second lifting force from a rising CAD – which will both combine to exert more upward force on Canadian energy stocks than the upward force that American stocks will enjoy from the rising oil price alone.

Investors looking to take advantage of a great buying opportunity in today’s depressed energy stocks are quite right in snapping up some bargains among the U.S. energy stocks. Yet they could be increasing their upside potential by picking up some Canadian energy stocks by virtue of an additional boost supplied by an eventually rising CAD.

And here’s a little bonus: not only would they be buying energy stocks on the TSX at a discount, they would also be enjoying a nice exchange rate bonus when converting USD into CAD at the time of purchase.

Joseph Cafariello