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  5. CNQ: Hi, Energy sector has been weak for past few months, for a variety of reasons. [Canadian Natural Resources Limited]
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Q: Hi, Energy sector has been weak for past few months, for a variety of reasons. Oil and NG prices have been drifting lower and OPEC keeps sending mixed signals. US sanctions on Russia have only produced a muted response, with their Oil finding its way to India, China and many other countries. Oil is hovering back to $70 level and still there is no sign of US ready to fill in their SPR. After a strong 2021 and 2022 (and 1st half of 2023), do you think, current weakness could be temporary and it's just a short term breather ? Or, considering the cyclic nature of the sector ( possible recession concerns ) and history, it might be time to take some profits and reduce the sector weight, from your generally suggested 10% to say 5% ? If so, would you trim equally or in any order among these holdings ? Thank You
Asked by rajeev on December 11, 2023
5i Research Answer:

The sector is always volatile and cyclical. The TSX Energy sector is still up 0.98% for the year. Yes, there will be some selling pressure if oil prices stay low or go lower. But the reverse is 100% true as well. Sentiment is weak for the factors mentioned in the question, but thus so are valuations. The recent weakness relates to high US oil exports, concerns on China and other factors. We remain optimistic with the long-term oil prices given the supply and demand mismatch (most companies are not incentivized to drill heavily as in previous cycles due to ESG, political pressures, etc.). In addition to low valuations, high dividends, share buybacks, sector companies are in the best financial shape of any prior cycle. We would not see a compelling reason to go massively underweight. 10% is still well below the TSX weighting. We think investors can still have some sector exposure. Sector allocation needs to be a personal decision, but we do not think investors need 17.6%, which is the current TSX sector allocation. With personal goals being the main driver, we would still see 5% to 10% as appropriate for most investors. 

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