Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Stu Morrow, chief investment strategist for Morgan Stanley Wealth Management Canada, published a two-part report on domestic oil and gas stocks. The focus was the sector’s participation in net zero emissions commitments and also featured important data about the future of global oil consumption,
“The Canadian Energy sector is currently trading at the steepest discount to long-term average valuations relative to any other sector in the S&P/TSX Composite Index. We believe this pessimistic outlook reflects significant uncertainty related to the future demand for oil and gas, but at the same time, does not reflect the potential for narrowing West Texas Intermediate and Western Canadian Select crude price differential (known as the ‘WTIWCS differential’) over the near-term, nor a decline in growth investments of renewable technologies over the long-term … Total global energy demand will rise, while oil’s share of the pie will decline over time. Over the last few decades, the liters of oil consumed per US$1,000 of global GDP have steadily declined, falling from 100 liters in the early 1980s to 65 liters today according to the International Energy Agency (”IEA”). Despite oil’s decline as a share of global GDP, the net demand for oil has increased. Conversely, the IEA’s base case foresees annualized improvement in energy intensity of 2.4 per cent from 2021 to 2030, contributing to linearly declining oil demand which is expected to reach a peak of 107 million barrels per day (mb/d) by 2033, which is still higher than the 99.2 mb/d consumed in 2022. Morgan Stanley & Co. LLC (“Morgan Stanley”) expects oil’s incremental market share of global energy will decline by some 0.50 per cent per year over the next decade, while still leaving considerable demand thereafter’
Morgan Stanley oil and gas analyst Devin McDermott has an overweight/attractive rating on Cenovus Energy.
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BMO senior economist Robert Kavcic is tracking Canada’s historic population surge,
“Canada’s population surged by almost 1.2 million people in the year through July 1st, by far the largest absolute increase on record. In percentage terms, the 3.0-per-cent year-over-year gain matches the largest yearly increase since the 1950s post-war boom. On net, Canada has seen almost 700k nonpermanent residents pour into the country over that period, accounting for more than half of the population gain (these are mostly international students and temporary foreign workers). Suffice it to say that the flood of demand for things like rental housing and personal services, as well as pressure on existing infrastructure, is not letting up”
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BofA Securities U.S. oil and gas analyst Doug Leggate explains how higher spot oil prices don’t affect sector stock price as much as many investors would expect, because futures prices either don’t move or go lower,
“In the three decades that we’ve looked at this sector, any time Saudi is not challenged for market share it will defend price. This is the principal that lies behind our l/term, $80 Brent assumption which remains the base case for our current sector view. But the consequence of artificial price support is that backwardation [downward sloping futures price curve) is embedded as a permanent characteristic of the futures curve. So, while oil above $90 is clearly positive for near term sector free cashflow, longer dated prices depressed by a spare capacity overhang remains a tangible headwind to valuations… Incorporating our commodity teams updated assumptions (WTI 2H23 to $86 from $76, FY24 $86 from $75), sector EPS moves up by 33% in 2H23 and 30% in 2024 led by high beta names. But with our $80 Brent assumption unchanged from 2025, DCF based PO’s [discounted cash flow-derived stock price objectives] move up just 5%, mimicking a sector where absolute performance has stalled”
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Diversion: The End of Trump Inc. – The Atlantic