Some of the Canadian energy stocks may see a price
appreciation in a merger & acquisition activity if OPEC’s meeting on June 5
results in the continuing of keeping oil production stable. But if a decision
is reached as to reduce the production ceilings and the non-members follow
suite, one can then see a recovery of crude oil price up to 60 USD to 70 USD
per barrel. This will give some room to the companies whose finances are not in
good position with oil prices trading below 45 USD.
If this price appreciation does not materialize during the
current year, the said companies will have to revise downwards the value of
their assets thus narrowing the margin between the offer and the demand in the
merger & acquisition activity. Of course, this very expectation is the fuel
for the mergers & acquisitions activity.
Under these conditions, it would be logical to look for
companies whose costs and debt levels are low but which have seen their share
prices unreasonably depreciate to bargain levels.
As far as the mining industry is concerned, the drop in the
metals prices prompted industry leaders to look for a rapid rebound by relying
on China’s possible massive demand thus considering it as the ultimate solution
to the industry’s current problems. But several monetary stimulus undertaken by
major economic regions did not affect gold prices despite some expectation
regarding a rise in the inflation.
The energy investors had parallel thoughts on the matter;
the recent crash in oil prices had burst a bubble and investors expected that
Saudi Arabia would solve the problem through production cuts but that was not
the case. The Canadian and U.S. companies have expended vastly their
production. And the energy prices had appreciated substantially by insufficient
resources; now the process has reversed.
This was followed by the deterioration of the assets of the
energy companies. In turn, they issued new shares and convinced the investors
that the proceeds would be used to liquidate debt. On the other hand, the mining
companies opted to wait for a recovery in the metals market for some time. But
the current situation forces them to write down their overvalued assets thus
incurring massive losses. The prolonged
downturn in the mining industry will also affect the low-cost producers,
despite blue chip names and dragging their share prices to bargain levels. Then
one will have to wait for substantially higher prices in order to see some improvement
in the cash flow and debt levels of the said companies. But when?
The successful recovery of the oil industry depends on the
extent of supply cuts which should be triggered by bankruptcies or shutdowns.
This in turn may cause a temporary drop in the energy indexes but once the
balance is restored, the current trend should reverse itself favorably. The
long-term trend is favoring increases in the curve steepness in the price of oil
thus a strong rally in the near-term commodity prices, say, this summer…
The next question would be the following:
Will oil price reach 80-90 USD level? Will gold reach 1550
USD level?
