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Profiting from rising fuel prices

Submitted by on July 21, 2014 – 4:20 pm

The information contained in this article is relevant at the time of publication. Markets conditions do change.  Do your own research when making investment decisions and consult a Financial Advisor to see if a potential investment fits your individual portfolio.

With prices at the pump recently topping $1.40 per litre and seemingly headed higher, is there a way for you to profit from rising energy prices?

Consider adding direct exposure to the energy sector to your investment portfolio.

The Canadian energy sector was the strongest performing sector on the Toronto Stock Exchange (TSX) for the first half of 2014; moving +19.2% higher.

The sector benefited from rising oil prices, increased geopolitical tensions (primarily in Iraq) have led to a rising ‘fear premium’ in oil prices.

Geopolitical issues aside, we believe there is a good case for the energy sector to continue to outperform in the months ahead:

– From a cyclical perspective, we believe we are transitioning from mid to late cycle, with the economic recovery now in its sixth year and the US Federal Reserve (Fed) inching closer to increasing interest rates.

– Based on historical market trends, now is the time the energy sector should begin to outperform, which is exactly what has occurred over the last few months.

– Another major support for our bullish call on energy is the recent narrowing of oil differentials in the WCS and WTI benchmark oil prices.

– Canadian oil (WCS) has consistently traded at a discount to WTI given its higher sulphur content and density.

This differential widened significantly in the second half of 2013, largely as a result of shipping bottlenecks (i.e. pipeline and rail capacity issues). However, this differential has narrowed in recent months from US$40 a barrel in late 2013 to US$20 a barrel more recently.

We believe this should drive stronger earnings and cash flows within the sector.

Entering 2014, energy stocks had been in a downward trend for most of the last two-years. They started to break out of that trend and move higher in January of this year (see chart below).

While there is still lots of room for this sector to continue to grow and perform well, the recent upward price movement in energy stocks has happened quickly; we could see a pullback in the sector if the overall market drops.

We would view any short-term drop in prices of these stocks as a good time to buy or add additional money, given the positive outlook for energy.

Within the energy sector Raymond James Ltd. prefers the integrateds: companies that are involved in exploration, production, refinement & distribution of oil and gas.

They are more attractively valued at 12.7 times forward earnings and 8-times on a price to cash flow basis.
Names Raymond James currently favours include Suncor Energy Inc (SU-T), Canadian Natural Resources Ltd. (CNQ-T) and Whitecap Resources Inc. (WCP-T) in the small-cap space.

If you are looking for broader energy exposure through an actively managed mutual fund, we recommend Calgary-based Canoe Financial and its strong energy expertise.

A great fit for most portfolios is the Canoe Energy Income Fund; it has significantly outperformed the Canadian energy index since inception and provides a healthy dividend yield.

Make the most of ‘pain at the pumps’ this summer, translate it into gains in your portfolio by adding energy exposure.

Mark Potter is a Financial Advisor with Limestone City Wealth Management Group at Raymond James Ltd in Kingston (www.limestonecitywealth.com). The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Member Canadian Investor Protection Fund.

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