McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Newsletter – July 2019

July 2019 – Canadian Energy Stocks

As of the beginning of this month, the Energy sector represented 17.10% of the TSX Composite, while in the US it represents only 5% of the S&P 500 Index. The benchmark weight representing 55% US and 45% Canada works out to a North American sector weight of 10.45%.


While the US energy stocks have performed better than the Canadian ones, I am focusing on the Canadian names with the lower valuations.


There are 42 individual companies that make up the Canadian energy sector of the TSX Composite Index. As of June 26th, the energy infrastructure pipeline and distribution companies have a combined market weight of 8.44%. This represents almost half the weight of the entire Canadian energy sector. The largest companies in this group are Enbridge, TC Energy, IPL, Pembina Pipe and Keyera.


Excluding the pipeline companies, the largest energy companies by market weight are Canadian Natural Resources, Suncor, Cenovus, Encana and Imperial Oil. Canadian Natural and Encana are both energy producers while Suncor, Cenovus and Imperial are both producers and refiners. These companies represent 6.11% of the Canadian energy index or 36% of the total energy weight of the TSX.


Totalling these two groups above shows that over 85% of the total Canadian energy sector weight is represented by the largest ten companies.


The remaining 32 companies only represent 15% of the Canadian energy sector weight. This is the principal reason that most institutional money managers largely ignore the smaller cap more volatile names.

Global Fundamental Outlook for Crude Oil

The global economic slowdown continues with the expectation of falling world crude demand. Much of this reduction in global demand can be attributed to the ongoing trade wars between the US and China, but also between the US and Europe. None of this is good for long term demand and it creates a great deal of business and government uncertainty.


Over the last several years, US shale production has risen sharply causing an industry oversupply of crude. However, two weeks ago this trend reversed somewhat with much greater than expected US crude inventory drawdowns. Unfortunately, this week’s numbers show a much smaller US inventory drawdown.


This week OPEC has agreed to extend its production cuts for another nine months. The US continues with its trade sanctions against both Iran and Venezuela. These two events are positive for crude markets.


Lastly many strategists believe that the Federal Reserve will be forced to make several more rate cuts this year. Should this materialize the US dollar will probably weaken against global currencies. Historically when both US interest rates and the US dollar fall, this is positive for commodity prices, especially gold and crude oil unless the current slowdown leads to a global recession.

Energy Stocks to continue Holding

As there is more positive news domestically in regards to pipelines, I recommend to continue holding Enbridge, TC Energy and Pembina Pipelines. These three companies have very limited commodity price exposure as their profits are principally volume based.


I still like Parex Resources for its solid balance sheet, good production growth and Brent pricing for its crude. I also still like Freehold Resources, a royalty play that has a solid dividend with a relatively low payout and a strong balance sheet with very little debt.


The only name I am concerned with is Torc Resources. It has a high dividend yield that is not covered when you deduct capital expenditures from their operating cash flow. I am deleting Torc Resources from both portfolios.

Energy Sector Weight

I am maintaining my North American benchmark market weight of 10.45% for this sector. Resulting from all this uncertainty, a neutral stance is warranted at this time but note that my recommended North American sector weight is considerably lower than the TSX Composite energy weight of 17.10%.


Peter McMurtry, BCom, CFA
Financial Writer
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