Energy stocks rally on oil surge with more upside ahead

Recent gains in energy stocks may be driven by higher oil prices due to the Middle East conflict, but the gains aren’t just temporary hype, says Daniel Greenspan, senior analyst and portfolio manager, CIBC Global Asset Management.

“Despite some of the geopolitical risk getting priced in, at the same time, we see potential for a lasting upward shift in valuations for Canadian energy producers for a couple of different reasons,” he said in a March 31 interview.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Global Asset Management.

Even if the conflict ends, oil prices likely won’t return to pre-war levels, he said. In fact, a risk premium should persist due to supply fragility and infrastructure damage.

Also, while higher oil prices should support Canadian energy stocks, producers in stable jurisdictions like Canada would still attain a valuation premium, he said.

“With balance sheets already in very good shape, and with well-defined capital return programs in place, we expect shareholders will be rewarded with dividend growth, special dividends and share buybacks that will help support stock prices.”

Outside of oil, Greenspan said Canada has the opportunity to capitalize on liquefied natural gas, including LNG Canada, the country’s first large-scale facility.

“The first phase of the project is producing 14 million tonnes a year from two trains, with the majority of that production sold into Asian markets. Phase two of the project could double capacity, making it one of the largest LNG facilities in the world.”

Cedar LNG and Woodfibre LNG are also in development, and there are opportunities to add more facilities in the future, he said.

Nuclear is an overlooked part of the energy sector, Greenspan said, with energy security concerns from oil and LNG disruptions highlighting its role to provide a low-carbon baseload power globally.

“Canada has the opportunity to be a global leader on nuclear with exposure to new builds and maintenance of the existing fleet, and through exposure to high-quality uranium production in Saskatchewan.”

Top equity picks

For Canadian oil producers, Greenspan likes Cenovus Energy in the large-cap space. Cenovus’s Toledo Refinery is expected to see continued improvements in downstream performance and changes to personnel, he said. And its recent acquisition of MEG Energy adds high-quality assets to the company’s growth strategy.

“The balance sheet at Cenovus is approaching its target, and we expect to see meaningful improvements in shareholder returns as these milestones are achieved,” Greenspan said.

In mid-cap oil, he likes Whitecap Resources due to its high-quality assets, experienced management team and recent deal to buy Veren, a Canadian oil and gas exploration company.

“The company has been a consistent operator and offers investors exposure to quality resource plays,” he said. “We think the multiple can continue to expand as Whitecap continues to deliver consistent quarterly results.”

Keyera is Greenspan’s top pick in midstream infrastructure. The company is expected to provide upside as it closes its acquisition of Plains All American’s Canadian NGL business later this year.

“We expect to see multiples normalized as Keyera delivers on the integration of the new assets into the portfolio, and the market gets comfort with the new business.”

Greenspan’s top pick in nuclear is Cameco, which offers investors access to uranium and the broader nuclear value chain in top-tier markets.

“We see transformative tailwinds for nuclear energy that are a benefit to Cameco that are expected to persist over the medium term. Specifically, as countries and companies seek to reduce greenhouse gas emission targets, we expect nuclear to play a significant role in carbon reduction plans,” he said.

A focus on energy security is another tailwind that will support nuclear demand, positioning Cameco to benefit over the medium term, Greenspan said. And its acquisition of Westinghouse in late 2023 also adds stability to the company, helping it deliver steady cash flows.

This article is part of the Advisor To Go program, sponsored by CIBC Global Asset Management. The article was written without input from the sponsor.