Thoughts on recent market volatility

Global Portfolio Advisory Group

February 6, 2018

Following a sharp rise in the year-to-January 26th (7.5%), equity markets have witnessed an extraordinary rise in volatility over the past few trading sessions leaving most major indices down 1%-5% on a year-to-date basis. From its recent highs, the S&P500 index has dropped 7.8% on an intraday basis. The past few months have been characterized by steadily rising markets with few notable losing sessions and unusually low volatility. Typically, equity markets experience one or two corrections of at least 5% per year as witnessed in the period 2012 to 2016 (see Chart 1). However, up until late January 2018 the S&P500 index had not experienced a correction exceeding 6% since mid-2016. Moreover, a double-digit percentage drawdown last appeared two years ago in December-2015/early-2016 (-12.9%). Thus, the sharp rise in volatility and rapid correction in global markets witnessed in the past few days has followed a very long stretch of unusually low volatility and a lack of profit-taking-driven selling. As volatility spiked in recent days, many investment managers found themselves in need of unwinding large investments (and/or short positions) leveraged on the view that the unusually low volatility environment of the past few months would continue, which significantly added to selling pressure in global markets over the past 24 hours.

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Q4/17 results – modest CFPS miss on higher opex; production beat, lower capex

Canadian Market Summary

February 6, 2018

  • IMO announced Q4/17 results with CFPS coming in 3% below consensus ($1.11/sh vs $1.15/sh), while production came in 2% above consensus at 399 mboe/d (vs 393 mboe/d). Capex for Q4/17 was $216M, 27% below consensus of $294M. The CFPS miss was mainly due to higher operating costs: total production expenses of $1,460M were 9% higher than our estimate of $1,337M.
  • Production. Kearl Q4/17 production came in at 176 mbbl/d gross, or 125 mbbl/d IMO’s share, 4% below our estimate of 130 mbbl/d (net to IMO). Q4/17 Kearl production was affected by planned turnaround activity (~25 mbbl/d gross, 18 mbbl/d net). IMO expects Kearl production to be 200 mbbl/d gross in 2018 and reach 240 mbbl/d by 2020. The production increase will be made possible partially by a $400M (IMO’s share) investment in supplemental crushing capacity and front-end flowline redundancy, which will improve reliability. This work is expected to be complete by year-end 2019. We currently estimate Kearl production of 134 mbbl/d in 2018, ramping up to 161 mbbl/d in 2021 (net to IMO), and operating costs of C$30/bbl dropping to ~C$26/bbl from 2018 to 2021 respectively. In Q4/17, Cold Lake production of 168 mbbl/d was within 1% of our estimate, while Syncrude volumes of 81 mbbl/d (IMO’s share) were previously disclosed.

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