Q: Hi, Oil prices have been weak and the Energy sector, lately has not been trading well. E&P Companies have been under more pressure, compared to Integrated ones. We own both SU and CNQ (combined weight 8%) and have been quite happy with their operational/financial performance and generous plans for return of capital to shareholders. However, it's not clear, how Oil prices, Demand/Supply dynamics and geo-political factors are likely to play out over near and long term, impacting their profitability/growth and share prices. Could you please share your views.
1. If outlook for Energy is likely to remain uncertain, in near term and we want to limit risk of further drawdown by cutting exposure to the sector ( and raise some cash ), which of the two would you reduce first and why ?
2. Should seasonal factors (winter) or US Elections influence the timing of such action ?
Thank You
1. If outlook for Energy is likely to remain uncertain, in near term and we want to limit risk of further drawdown by cutting exposure to the sector ( and raise some cash ), which of the two would you reduce first and why ?
2. Should seasonal factors (winter) or US Elections influence the timing of such action ?
Thank You
5i Research Answer:
Integrated companies are nearly always less volatile, as their business is partially dependent on volume and margins, as opposed to prices. But the sector will always be cyclical. The current downturn is due to fears of OPEC supply, China weakness and a US possible recession. We like both CNQ ans SU a lot and would be less inclined to sell or even try to time this sector, assuming sector weighting is appropriate. But if we had to choose, today we would sell SU. The election may cause short term volality, with a Trump win seen as 'better' for the sector. But we doubt it will really matter. Global pricing and events will still be far more important for the outlook for the sector.