01/08/2015 01:13 EST | Updated 03/10/2015 05:59 EDT

With crude oil prices in free fall, experts urge investor caution

CALGARY - The price of crude oil is continuing to crater and it's dragging many Canadians' investment portfolios down with it.

A barrel of U.S. benchmark crude oil has been going for under US$50 in recent days — less than half its 2014 high — and share prices have been beat up as a result.

Energy makes up a good chunk of the Canadian market — about 20 to 25 per cent, according to Garey Aitken, chief investment officer at Franklin Bissett Investment Management.

Basing an investment strategy on the future direction of commodity prices is a "mugs game," he said.

"We're taking the current commodity price environment as a given and thinking about the world that way."

Robert Laidlaw, with Calgary investment dealer Acumen Capital Management, said he's been hearing more from concerned clients during these "unsettled times."

"I think everybody's very exposed and it's not just the energy stocks," he said.

"There are so many spinoffs that the energy sector affects right across Canada. We've got one of the best banking sectors in the world, but you see banking stocks have been off as these prices have come down due to their exposure to the energy and gas sector."

So what is an investor to do?

For starters, resist making rash decisions.

"The people who typically get hurt are the ones who panic and bail out at, or close, to the bottom," said Laidlaw, who is expecting to see some recovery toward the end of the year.

He notes past downturns he's witnessed throughout his 30-year career have been followed by even stronger rebounds.

For instance, in 1985, oil prices dropped 65 per cent in six months, but one year later rose 84 per cent. In 2000, crude fell 45 per cent, but was back up 86 per cent a year later. In 2008, oil prices lost 72 per cent of their value in six months, but rose 100 per cent a year later.

But as crude prices continue to search for a floor, it's probably not the best time to go bargain hunting in the energy sector, said John Stephenson, president and CEO of Stephenson & Company Capital Management.

"This is not a buying opportunity in my opinion," said Stephenson, who predicts the energy doldrums to drag on for two years.

"It's like catching a falling knife. If you want to slice your fingers off, go ahead."

For the time-being, Stephenson said it's worthwhile to invest in sectors likely to benefit from lower fuel prices, like airlines and industrials.

But to the extent an investor wants to stay in energy, Stephenson urges caution.

"If you're hanging out in one of the higher quality names, like a Canadian Natural Resources Ltd. (TSX:CNQ), for example, or Suncor Energy Inc. (TSX:SU), then you probably would just stay in and grind it out."

The same goes for robust mid-sized players like Vermilion Energy Inc. (TSX:VET), ARC Resources Ltd. (TSX:ARX) and Baytex Energy Corp. (TSX:BTE).

However, there's not much upside for weaker, smaller firms.

"I would be inclined to take your money and run, even though it would be a painful loss. The prospects are not very good. The worst case would be the company just ceases to exist and you lose all your money."

Laidlaw agrees it makes sense to be cautious, but takes a bit more of an optimistic view.

"Would I dive in lock, stock and barrel right now? I wouldn't. But I do think there's opportunity for people do some selective buying if you have some cash on the sidelines."

Laidlaw likes companies that have hedged their production at prices higher than the market. For instance, Crescent Point Energy Corp. (TSX:CPG) has half of this year's production locked in at around US$76 a barrel, given current foreign exchange rates.

Aitken sees buying opportunities, but only if they make sense under current conditions.

"When I say that we're finding opportunities in the energy space right now, that's independent of a recovery in commodity prices," he said.

"Certainly that would be welcome and it would help the cause, but we would never want to be making investments reliant on the recovery."

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