CALGARY, Alberta, June 21 - A lot of oil analysts say crude prices around $70 a barrel are too steep, given the tenuous state of the economy, and energy investors don't seem to want to argue yet.
By and large, Canadian energy share values reflect an oil price somewhat lower than it is, according to some experts. That could be due to a combination of risk aversion and predictions that natural gas markets will get uglier.
But it may give investors an entry point into a sector that has been beaten down from its record highs of a year ago, but has staged a decent recovery since the end of 2008.
"With oil prices having a seven in front of them, the market's assuming that there are green shoots of recovery coming out the back of the year," FirstEnergy Capital Corp analyst Martin Molyneaux said.
Molyneaux figures energy stocks reflect oil prices in the mid-$60s per barrel. U.S. oil weakened to $69.55 on Friday, after hanging above $70 for the previous eight days.
Crude prices have doubled since the start of 2009, but are still half of what they were a year ago.
"We're pretty bullish -- our outlook for oil is $75 next year. It's all about how the companies and the countries are going to spend. Nobody's increasing capital spending programs right now and, if anything, they're still going down."
That could mean a quick return to tight oil supplies as economies return to growth, fueling demand.
At a rather subdued Canadian Association of Petroleum Producers investment symposium in Calgary last week, top executives with Nexen Inc (NXY.TO), Talisman Energy Inc (TLM.TO) and others said they still lack the confidence that oil will hold its gains to fatten their 2009 spending budgets.
In a recent report, analysts at Dundee Securities cited factors such as U.S. dollar weakness and wagers on the speed at which the economic downturn ends for oil's recent gains, rather than evidence of big gains in energy demand.
Some market strategists wonder aloud if rising prices for in numerous commodities in the past month suggest speculative money is starting to flow back in.
Meanwhile, brimming natural gas inventories have kept prices for that fuel at a third of the value of a year ago.
Here's how the energy stocks shape up: The TSX oil and gas subindex closed on Friday at 262.75 points. That represents a drop of more than 40 percent from 12 months ago, but a gain of about 20 percent from the start of 2009.
Swings in the broad market have been less pronounced. The S&P/TSX composite index is off 32 percent in the past year and up 13 percent in 2009.
Tristone Capital analyst Chris Feltin said he believes oil-weighted stocks, at least large-cap names, are valued fairly at current levels, pricing in oil at $75 a barrel.
"Where the gains could come would be if there are efficiencies gained in the oil sands in terms of capital costs, benefits that could result in the economics improving for those projects so they require a lower oil price," Feltin said.
Potential triggers for boosting share prices include a bona fide improvement in the global economy to generate real fuel demand gains, analysts say. That's anything but an easy call, given conflicting economic data each week.
Another is an uptick in takeovers, something that has already helped move stocks upward this year, especially after Suncor Energy Inc (SU.TO) uncorked its C$22 billion ($19.5 billion) acquisition of Petro-Canada (PCA.TO) in March.
In fact, of the seven top percentage gainers among oil stocks this year, four have been involved in takeover activity, or rumored to be.
Activity intensified Thursday when Netherlands-based Pluspetrol Resources Corp NV launched an unsolicited C$400 million bid for Canada's Petro Andina Resources Inc (PAR.TO), which produces oil in Argentina. Petro Andina shares jumped above the bid price, suggesting investors expect a sweeter offer.
"Undervalued companies are going to get put into play one way or another," Molyneaux said.
By and large, Canadian energy share values reflect an oil price somewhat lower than it is, according to some experts. That could be due to a combination of risk aversion and predictions that natural gas markets will get uglier.
But it may give investors an entry point into a sector that has been beaten down from its record highs of a year ago, but has staged a decent recovery since the end of 2008.
"With oil prices having a seven in front of them, the market's assuming that there are green shoots of recovery coming out the back of the year," FirstEnergy Capital Corp analyst Martin Molyneaux said.
Molyneaux figures energy stocks reflect oil prices in the mid-$60s per barrel. U.S. oil weakened to $69.55 on Friday, after hanging above $70 for the previous eight days.
Crude prices have doubled since the start of 2009, but are still half of what they were a year ago.
"We're pretty bullish -- our outlook for oil is $75 next year. It's all about how the companies and the countries are going to spend. Nobody's increasing capital spending programs right now and, if anything, they're still going down."
That could mean a quick return to tight oil supplies as economies return to growth, fueling demand.
At a rather subdued Canadian Association of Petroleum Producers investment symposium in Calgary last week, top executives with Nexen Inc (NXY.TO), Talisman Energy Inc (TLM.TO) and others said they still lack the confidence that oil will hold its gains to fatten their 2009 spending budgets.
In a recent report, analysts at Dundee Securities cited factors such as U.S. dollar weakness and wagers on the speed at which the economic downturn ends for oil's recent gains, rather than evidence of big gains in energy demand.
Some market strategists wonder aloud if rising prices for in numerous commodities in the past month suggest speculative money is starting to flow back in.
Meanwhile, brimming natural gas inventories have kept prices for that fuel at a third of the value of a year ago.
Here's how the energy stocks shape up: The TSX oil and gas subindex closed on Friday at 262.75 points. That represents a drop of more than 40 percent from 12 months ago, but a gain of about 20 percent from the start of 2009.
Swings in the broad market have been less pronounced. The S&P/TSX composite index is off 32 percent in the past year and up 13 percent in 2009.
Tristone Capital analyst Chris Feltin said he believes oil-weighted stocks, at least large-cap names, are valued fairly at current levels, pricing in oil at $75 a barrel.
"Where the gains could come would be if there are efficiencies gained in the oil sands in terms of capital costs, benefits that could result in the economics improving for those projects so they require a lower oil price," Feltin said.
Potential triggers for boosting share prices include a bona fide improvement in the global economy to generate real fuel demand gains, analysts say. That's anything but an easy call, given conflicting economic data each week.
Another is an uptick in takeovers, something that has already helped move stocks upward this year, especially after Suncor Energy Inc (SU.TO) uncorked its C$22 billion ($19.5 billion) acquisition of Petro-Canada (PCA.TO) in March.
In fact, of the seven top percentage gainers among oil stocks this year, four have been involved in takeover activity, or rumored to be.
Activity intensified Thursday when Netherlands-based Pluspetrol Resources Corp NV launched an unsolicited C$400 million bid for Canada's Petro Andina Resources Inc (PAR.TO), which produces oil in Argentina. Petro Andina shares jumped above the bid price, suggesting investors expect a sweeter offer.
"Undervalued companies are going to get put into play one way or another," Molyneaux said.
