S&P TSX Composite Index: 8 Calgary oilpatch companies set to storm back into the index

S&P TSX Composite Index: 8 Calgary oilpatch companies set to storm back into the index

As a result of rising crude and natural gas commodity prices, declining leverage ratios and expanded pipeline capacity from Enbridge Inc. s Line 3 replacement and TC Energy Corp. s Nova gas expansions, Canadian oil and gas companies have outperformed the broader market this year. We apologize, but this video didn't load.

You can see other videos from our team by tapping here. Try refreshing your browser, or Eight oil companies that are set to storm back into the main TSX index in the long-awaited energy resurgence. The S&P TSX Capped Energy Index has climbed 87 per cent year-to-date, outperforming the Canadian benchmark index's 23 per cent jump. ATB Capital Markets expects that eight Calgary oilpatch companies will be added to the key S&P TSX Composite Index in December. According to a Tuesday research note, the bank predicted that S&P Global Inc. will add Advantage Energy Ltd., Baytex Energy Corp., Freehold Royalties Ltd., Paramount Resources Ltd., and Peyto Exploration and Development Corp. Secure Energy Services Inc., Tamarack Valley Energy Ltd., and Topaz Energy Corp. will be added to the key index next month.

ATB believes that five companies will likely be dropped from the composite index at the same time, including Sun Opta Inc., Martinrea International Inc., Real Matters Inc., and Westport Fuel Systems Inc. Analysts believe that a handful of additional energy names, such as Nuvista Energy Ltd., are poised to join the index in the early part of next year, as the outlook for oil and gas commodity prices remains bullish. The potential for a massive reinclusion is a reversal of fortunes from just two years ago when S&P Global kicked six Canadian energy companies off the index in one stroke. That trend began to reverse earlier this year when Birchcliff Energy Ltd. joined the Composite Index, and now a larger group of its peers is set to follow suit.

The industry is writing itself into the index, said Rafi Tahmazian, partner and senior portfolio manager with Canoe Financial in Calgary, adding that inclusion on major indices has a waterfall effect, where an inclusion or exclusion from a key index leads to an outsize influx or exodus of investors in a given stock. The industry is writing itself into the index because more than half of the market's money is passively managed in index-linked funds, so additions to the index can lead to dramatic moves in share prices. They have to chase what's going into these indices, Tahmazian said of passive fund managers, adding that the same thing could happen in the first quarter of 2022 when more companies including Nuvista could make the cut into the composite index.

Nuvista shares have gone up 671 per cent this year, rising $6.18 each to $7.10 per share on Wednesday. Both Tahmazian and ATB think that the company's $1.6 billion market capitalization and trading volume may be too small to miss the December index rebalancing. Tahmazian said he will continue to buy energy stocks. Where can I invest in something with 25 per cent free cash flow? He said the amount of money companies are generating in excess of their costs and dividends is a measure of the amount of money they are generating. Other indices have spurred buying in Canadian stocks, as well as the S&P TSX Composite Index, investors believe that other indices have spurred buying in Canadian stocks. New York-based index provider MSCI Inc. updated its MSCI Global Standard Index on November 11 and added Calgary-based natural gas producer Tourmaline Oil Corp. to its benchmark list. Tourmaline shares have risen 162 per cent, or $28.43 each, so far this year, reaching $45.94 per share Wednesday.

According to a Raymond James research report, Tourmaline's sister company, Topaz Energy, is poised to join the main Canadian index in December and could benefit from joining the S&P TSX Composite ESG Index, Jantzi Social Index and S&P TSX Composite Carbon Price Index. Raymond James analyst Jeremy McCrea and George Huang wrote in the report as Topaz continues to improve trading liquidity and the investment community updates its ESG score with the release of its inaugural ESG sustainability report. When a company is added to an index, it increases the demand for the stock among passive fund managers, according to ATB Capital. Index inclusions and removals are an important attribution factor for share price returns, as well as for direct index-linked reasons like ETFs, mutual funds and derivatives, and index changes impact institutional investors addressable universes and benchmarks, according to ATB analysts in a Tuesday note.

The market cap of the TSX Energy Index is around $220 billion, so about 2.5 per cent of the float will be created by passive buying, according to Nuttall, who believes that passive buying will encourage FOMO on the part of the underweight fund managers. Nuttall said volume trading has increased in the companies most likely to be included in the December rebalancing. He considers the inclusion of the Tamarack Valley and Nuvista in the main index too close to call.