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Earnings season in the energy sector has wrapped up, and Canada’s largest oil and gas companies handily beat profit forecasts in the third quarter.

The bad news for those firms and for their shareholders: profits don’t seem to matter at the moment. Canadian energy shares have been doubly hit by the slide in global oil prices, combined with a steep discount on Canadian crude, which has drowned out the positive sentiment normally generated by strong earnings performance.

“If your results are good, your stock sells off; if your results are bad, the stock gets clobbered,” said Les Stelmach, a portfolio manager at Franklin Bissett Investment Management.

The disconnect between recent earnings and equity performance has dragged the valuations on some big Canadian energy companies down to levels not seen since the bottom of the global oil crash in early 2016.

“Embedded in the valuations of these stocks is a pretty grim scenario, which I don't think is going to come to pass,” Mr. Stelmach said, suggesting there are some good bargains for investors willing to stomach the volatility.

Over the past four months, the energy sector within the S&P/TSX Composite Index is down by 17 per cent, proving to be the biggest drag on the Canadian stock market over that period. The decline continued even through a series of good earnings releases.

The third-quarter profits reported by those companies collectively grew by 41 per cent from the prior year, according to Thomson Reuters data. As of six weeks ago, analysts were expecting growth of just 24 per cent.

That quarterly performance extends a recovery for the oil patch that has been ongoing for more than two years.

Back in 2014, a global oversupply sent oil prices into a nosedive, which ultimately forced the Canadian energy sector to retool. A wave of consolidation and cost cutting followed, from which the oil patch emerged leaner and more efficient.

“While they’ve done well on the cost side, there’s still the political overhang,” said Greg Gipson, chief investment officer at Grayhawk Investment Strategies and a veteran energy investor. “There seems to be a reluctance to address the energy sector in Canada, to getting pipelines built.”

The long series of setbacks in major pipeline projects have contributed to a bottleneck in the country’s energy transportation network, making it increasingly difficult to get product to market.

The price of Canadian crude has steadily weakened as a result, opening up a discount against U.S. prices as high as US$50 a barrel this fall.

Then global oil benchmarks started declining as well. West Texas Intermediate lost US$20 a barrel in just more than a month, compounding the pressure on Canadian prices and Canadian energy stocks alike. On Thursday, the price of Western Canadian Select sank to a new low of just US$13.46 a barrel.

That all made for a hostile environment in which to report financial results, Mr. Stelmach said.

Last week, for example, Arc Resources Ltd. slightly missed earnings expectations, but its underlying business “remains very solid,” Mr. Stelmach said. Arc’s management outlined an internally funded growth plan with returns that seem to make sense even under the current price environment.

“The market looked at that and they punished the stock pretty significantly,” he said. Arc’s share price declined by 15 per cent in the two trading days following its earnings release.

Investor interest is unlikely to return to the sector in the current commodity environment, and the market is probably waiting to see if oil prices settle into a lower range, or if there is to be a swift recovery, Mr. Gipson said.

And if oil prices prove once again to be “lower for longer,” then “there’s maybe more interesting opportunities elsewhere,” he said.

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