Martin Roberge leads off our inaugural issue of the Legacy Wealth Weekly, highlighting the IMF’s biannual World Economic Outlook. While the IMF forecasts suggest little progress has been made in global growth, downside risks to GDP have moderated owing to the decline in longer term bond yields tied to low interest rates, low oil prices, and US $ ‘depreciation’. While the US $ remains stubbornly high, it seems to have stalled out, at least for now, acting as a tailwind for most “risk” assets. Martin also takes a look at the valuation debate swirling around energy share prices. The next positive surprise could be higher refinery run rates, where refineries tap crude oil inventories to replenish gasoline stocks. While the Canadian energy complex looks rich on profitability measures, Martin points out that this is normal at cycle troughs. Less volatile sales and book-based measures of valuation remain below historical averages. Regardless of the valuation, oil prices have clearly broken out to the upside this week, and cash is flowing back into the sector. Having said that, Martin’s Chart of the Week shows us that at 2100, the S&P 500 became both overbought and tactically overvalued this week.
Michael Welch, who works alongside our US Portfolio Strategist, Tony Dwyer, has put out a short piece noting the low level of investor bearishness in the US. Michael’s chart shows that the last few times the % of bears was < 13.9%, the S&P 500 had an average pullback of -6.17% over 13 days. Looks like short term caution is warranted South of the border.
Lastly we’ll leave you with two separate energy pieces, John Bereznicki’s Q1/15 oilfield services earnings playbook, and a new Junior + Intermediate E&P weekly our energy team is putting out. As John has stated previously, Q4 oilfield services numbers reflected the inertia of E&P spending from a more favorable commodity price environment. Now that we’re in the “new normal”, John’s Q1 EBITDA expectations are about 20% below consensus. The pressure pumpers were likely the hardest hit as they have sticky cost structures, making it difficult for them to defend their margins. Contract drillers will also likely see a meaningful decline in earnings, though not to the same degree as their pumping peers. John and Oliver continue to view 2015 consensus estimates as too optimistic, believing street estimates will fall as the season unfolds. Many service providers remain highly levered, and dividend cuts are a definite possibility to protect balance sheets and working capital. That said, oil price sentiment is likely the largest driver of share prices going forward. The energy team’s Charts of the Week highlight the “flight to quality” mentality that has set in, causing a valuation discrepancy within the sector. As such, the team feels that early movers into smaller cap E&P names will be rewarded. Kicking Horse (KCK), Marquee (MQL) and Rock Energy (RE) all screen well on valuation and balance sheet metrics.
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Legacy Wealth Partners
Penni Johnston-Gill, PFP
Senior Investment Advisor
Colin Marks, B.Comm, LLB
Senior Investment Advisor
Michael Richard, B.Comm
450 – 1 Street SW, Suite 2200
Calgary, AB T2P 5H1