Transcript: Canadian oil still a solid investment in the age of climate concerns
Zeba Mirza, senior research analyst with Foyston, Gordon & Payne, says Alberta’s oil sands are low-decline, long-life reserves with very low geological risk.
- March 29, 2022 March 28, 2022
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive, and powered by Canada Life.
For today’s Soundbites, we talk about oil investing with Zeba Mirza, a senior research analyst with Foyston, Gordon & Payne. We talked about oil prices, inventories, and climate change. And we started by asking if investing in oil still makes sense.
Zeba Mirza (ZM): Actually, yes, we think from a performance perspective, investing in oil really still does make sense. Main Street has been reluctant to invest in oil because of a mistaken impression that transition is imminent, and the sector is dead. It really isn’t. Prices should remain high, yield valuations remain really compelling and energy equities actually provide a very strong hedge for inflation. It’s quite apparent that the Russian invasion has been game changing for the energy space. This crisis has made a tight supply situation even tighter. But the confluence of these factors essentially means this sector is going to continue to generate very strong cash returns to shareholders.
The impact of climate concerns on Canadian oil.
ZM: In the past, what we had been seeing is a very singular focus on the “E” component of ESG, which is the CO2 emissions. Canadian companies have actually been able to demonstrate progress on emission reduction via technology. The newest plant produces a barrel of oil with 60% fewer emissions per barrel as compared to the oldest plant. And we know that the industry has really committed to improve further. Our industry is almost a manufacturing/industrial-style kind of process. It lends itself to carbon capture quite well. We don’t expect ESG headwinds to go away within the energy space. But what I kind of hope now is that the “S” and the “G” components of ESG will also get increasing attention, and we know that Canada scores extremely well on those components. And I am comforted by the fact that the Canadian companies are trying to address their issues head on.
Where global inventory levels stand.
ZM: So, OECD [Organization for Economic Co-operation and Development] inventories are what we look at. And that is about 2.6 billion barrels, which is an eight-year low, and it is about 8.5% below the five-year pre-pandemic average. So, I would say inventories are pretty tight and historically there is a very strong inverse correlation between inventories and the price of oil. We see demand recovering. So, what does that mean for oil prices? I’d say that’s a pretty constructive outlook for oil prices.
What she thinks of the plan by the largest Canadian oil producers to reach net zero GHG emissions by 2050.
ZM: Oh, it’s an ambitious plan, I’ll give you that. And it’s going to require incredible cooperation between industry and government. So, the Pathways alliance [a joint initiative of Canada’s five largest oil sands producers: Canadian Natural Resources Limited, Cenovus Energy, Imperial, MEG Energy and Suncor Energy] is broken into three distinct phases. We’re going to tackle a third of emissions by 2030, a third by 2040, and the final one third by 2050. That’s the plan. I really do like the staggered approach because it forces the companies to set up medium-term objectives. So, they’re not trying to chase an amorphous 2050 objective. They have to set short-term objectives and it allows us to keep them on track. So, we talk to our companies all the time. And they really have a sense of drive to make this actually be effective. I’m not saying it won’t be challenging. We know this plan is still in the very early days and we know they need government financing to help them to get across the finish line. But as plans go, the plan that Canada has put into place is actually more realistic than we have seen in any other area.
Names she likes in the Canadian oil sector.
ZM: When we look at stocks, we always try to look at the highest quality names in the space. So, we own all three of the integrated oil companies. We own Suncor [Suncor Energy, based in Calgary], we own Imperial [Imperial Oil Limited, based in Calgary], and Cenovus [Cenovus Energy Inc., based in Calgary]. The only E&P we actually own is CNQ [CNQ.TO, Canadian Natural Resources Ltd., based in Calgary] and we believe these four companies are the highest quality companies we have in the energy space, and I would be happy to own them any day.
And finally, what’s the take-away on oil investing.
ZM: The Canadian energy sector has very strong tailwinds which are going to support profits, free cash flow and returns to shareholders. The biggest headwind is really ESG. But energy is actually a great hedge to inflation, and this sector is still under-owned. It still represents a great investing opportunity. So, if you own these stocks, don’t sell them just yet! And if you haven’t owned them in the last decade, you really should explore them right now.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life.
Our thanks again to Zeba Mirza of Foyston, Gordon & Payne. Join us every Wednesday at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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