How the smart money bought oil and gas stocks in Q2

Institutional investors loaded up on about $1.4 billion worth of small and mid-cap Canadian oil and gas stocks in the second quarter of 2022, one of the highest levels seen in years, according to new research from Raymond James.

Analyst Jeremy McCrae combed through the financial filings of about 5,800 investment funds that have owned at least one Canadian exploration and production (E&P) stock since 2018. The results show "generalist" funds, those with less than five per cent of assets in Canadian energy, accounted for $1.1 billion, or 70 per cent of all buying, in the three months ended Aug. 15.

"The sector is 'investable' again," McCrae tweeted on Monday. "Q2 was the moment where the 'generalist' investor has finally come back (and in size)."

The second quarter of 2022 was a bright spot for Canadian energy, with solid cash-flow prints driven by oil prices hovering around US$100 per barrel (CL=F). At the same time, many companies promised to return more cash flow to shareholders, and announced progress on debt targets.

According to Raymond James, Spartan Delta (SDE.TO)(+26 per cent), Tourmaline Oil (TOU.TO)(+16 per cent), Baytex Energy (BTE.TO)(+15 per cent), Enerplus (ERF.TO)(+7 per cent) and Birchcliff Energy (BIR.TO)(+5 per cent) were the best-performing names in the quarter.

Of the 5,800 funds analyzed, 77 benefited from holding these stocks since the first quarter of 2022. Obsidian Energy (OBE.TO), Birchcliff, Crescent Point Energy (CPG.TO), and Vermillion Energy (VET.TO) were the most popular new positions for these firms in the second quarter.

Obsidian, Spartan and Surge Energy (SGY.TO) saw the greatest uptick in number of new funds investing in its stock in Q2. Surge, for example, had had 32 new institutions come into its stock last quarter, increasing total institutional fund holders by more than double.

"That said, it was not broad-based [buying] throughout, with many fund types still selling during that same time period," McCrae wrote in the report.

He notes much of the share price volatility seen in June as oil prices fell from recent highs was caused by high-turnover funds exiting positions.

"We can see much of this selling was actually picked up by low-turnover funds," he wrote. "If commodity prices were to weaken further, the new 'low-turnover' investors in these E&P names have a much longer-term horizon, which should limit further price depreciation."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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