The gains, which have pushed the Canadian Energy Sector Index up over 40% since Nov. 9, come as oil prices rise well above spring lows and big producers plan to raise spending and output in 2021. However, the bounce still leaves the index down 36% in the year to date.
“Some stocks still have the potential to double next year in our view, even after the sharp rebound of the last five weeks,” said Jean-Louis Le Mee, head of London-based hedge fund Westbeck Capital Management, which owns shares in Canada’s MEG Energy, Whitecap Resources and Baytex Energy.
Hopes that vaccines will lead to increased economic activity are moving investors to beaten-up sectors.
U.S. energy stocks are having their best quarter since 1989, though they are still down 34% for the year. Oilfield services companies, whose business depends on the pace of production, are popular again, with an index of companies up 60% since Nov. 9.
Canadian oil sands companies have been depressed for years due to high production costs and carbon emissions.
A New York State pension fund last week said it aimed for net zero emissions by 2040 and is reevaluating its holdings in nine oil sands companies, the latest big investor to shun Canada’s sector.
But Canadian producers look especially attractive now due to high cash flow potential, and as U.S. energy companies face possible restrictions under environment-minded President-elect Joe Biden, Le Mee said.
Canadian Natural Resources, Suncor Energy, and Imperial Oil – three of Canada’s top producers – have forecast higher output next year and bumped up their budgets.
Shrinking discounts on Canadian heavy oil, which cover additional refining costs and transportation to U.S. refineries, have helped. The discount sits at $14 per barrel, compared with $21 a year ago, according to NE2 Canada, narrowed by tight global heavy oil supply.
Deal activity is likely to accelerate, with producers seeking to reduce debt and find savings through greater scale, said Mark McRae, partner at business advisory firm Sequeira Partners, whose clients include oil and gas companies.
Whitecap Resources last week said it would buy rival TORC Oil & Gas in an all-stock deal valued at C$552 million.
Canadian oil M&A have topped $17 billion in 2020, outstripping 2019’s $15.5 billion, according to data from Refinitiv.
Smaller oil producers are holding spending flat, however, under pressure from lenders that kept them operating during the worst of the crisis, said Kevin Fougere, partner at Torys LLP law firm, who helps companies restructure.
Some smaller companies had enough cash in summer only to operate from month to month, and are now hedging oil prices to avoid another catastrophe in 2021, Fougere said.