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China likes energy stocks. Others should, too

China's Sinopec picked off a Canadian oil producer this week when it agreed to buy Daylight Energy Ltd. for $2.2-billion. That price marked a 120 per cent premium over its then-current trading price and a 44 per cent premium over its 60-day weighted average share price, according to CIBC World Markets analyst Adam Gill.

So what does the deal mean for other stocks in Canada's oil patch? According to Mr. Gill, it reflects positively on a number of undervalued explorers and producers in the west central Alberta area – particularly, Bellatrix Exploration Ltd. , Delphi Energy Corp. , NuVista Energy Ltd. , PetroBakken Energy Ltd. and Vero Energy Inc. Most of these stocks have jumped more than 12 per cent each over the past two trading days.

"All five have material land positions in the area and lack the same access to capital as their peers," Mr. Gill said in a note.

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The gains, and the deal, come as Canadian energy stocks and the price of crude oil have rebounded with the broader market. After slumping below $80 (U.S.) a barrel last week, oil has since climbed close to $86 a barrel on expectations that the current mood on the global economy has become too grim.

Still, Alex Bellefleur, financial economist at Brockhouse Cooper, argued in a note to clients that energy stocks are priced for a recession, but crude oil is not – making energy stocks attractive for reasons beyond prospective deal-making.

He pointed out that the Datastream World Energy index is now down almost 30 per cent from its April peak. Since 1973, the average decline from the start of a recession to a market trough is just 24.2 per cent. Yet, he believes that crude oil prices point to a relatively robust global economy. One of these assets is wrong, and he thinks the culprit is energy stocks.

"Energy is one of the sectors that has been punished the most heavily by investors, to the extent that global energy stocks now trade at only 8.4 times 12-month forward earnings," he said in his note. "While the earnings estimates may sound too optimistic, we note that such a low forward valuation level is consistent with the level reached in the last recession. In other words, Energy shares have already incorporated a recession that we do not think will occur on a global basis."

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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