A revival in the energy sector at home and growing geopolitical risk overseas have propelled Canadian oil and gas stocks to a three-year high, and there may be more room for them to run.
The Toronto Stock Exchange energy group was already on a steady climb this year, outpacing the broader market, before a militant insurgency in Iraq this week raised fears about oil supplies in world markets and drove crude prices to levels not seen since September.
Before the recent Mideast tensions, capital and deal activity had returned to the oil patch after a lull of more than a year. Domestic prices for oil and gas have strengthened, profits are climbing, and investors are recognizing restructuring efforts among some of the industry's bigger names, such as Encana Corp. and Husky Energy Inc., are starting to pay off.
"It's quite dynamic – you've got those underlying fundamentals, and add in some catch-up kind of thinking and we have what we have today," said Les Stelmach, vice-president and portfolio manager at Franklin Templeton Investments Corp. "Certainly it's pretty stunning in the last couple days how some of these stocks have really moved."
The TSX Capped Energy Index, which includes shares of integrated energy companies, producers and oil field service providers, jumped 2 per cent on Friday to close at 336.99 points, its highest since May, 2011. Big gainers included oil-weighted names such as Crescent Point Energy Corp. and Canadian Oil Sands Ltd., both up 3 per cent, and Cenovus Energy Inc., up more than 2 per cent.
International and U.S. benchmark oil rose 4 per cent this week, as fighting intensified in regions north of Baghdad. West Texas Intermediate rose 38 cents (U.S.) to settle at $106.91 a barrel on Friday.
The Canadian oil group is up 23 per cent this year, vastly outpacing a 10-per-cent increase in the S&P/TSX composite index, which represents the broader market. Some of that is due to bargain hunting as share-price values had lagged other sectors on such problems as deep discounts on Canadian oil due to constrained export capacity and a lengthy natural-gas-market trough, said Lanny Pendill, analyst at Edward Jones in St. Louis, Mo.
The industry is expecting Ottawa to give final approval to Enbridge Inc.'s Northern Gateway pipeline to the Pacific from Alberta in the coming days, though some First Nations opponents have said they will go to the courts to try to stop the project should it get a green light. TransCanada Corp.'s Keystone XL pipeline proposal remains stalled before the U.S. administration.
Still, other new pipelines and expansions around North America have helped ease the logjam, as has a major increase in oil-by-rail volumes. Meanwhile, a frigid winter lifted demand for natural gas, draining inventories across the continent and pushing up prices.
"Energy has underperformed over the last few years. This is one of the few sectors that really looks attractive from a valuation perspective and a lot of these companies are beginning to show some decent production growth and operating momentum," Mr. Pendill said.
The resurgence is reflected in big increases in property and corporate acquisitions as well as equity financing, following a drought in 2013. In the first quarter, equity issues totalled more than $3-billion, over six times the value of offerings a year earlier, according to TD Securities Inc. In the second quarter, the tally is above $2.5-billion with two weeks to go before quarter-end, more than double the full April-June period in 2013.
Mr. Stelmach said he believes Canadian companies with records of solid production increases and shareholder payouts will be rewarded with further share-price gains and an attractive cost of capital.