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’re talking about the future of energy with Zeba Mirza, senior research analyst with Foyston, Gordon & Payne. We talked about recent Canadian developments and the global move to carbon neutrality. And we started by asking about the state of the energy industry in the U.S.

Zeba Mirza (ZM): The Biden administration may not like oil and gas. But they haven’t explicitly penalized it or imposed a carbon tax on it. And that is why we’re actually seeing record levels of oil and gas production out of the U.S. When it comes to electric generation capacity, coal production has seen and continues to see gradual decline, the key emphasis being on gradual. And for renewables, what we’ve seen is new renewables projects, they did take a bit of pause. And that was because the contracts that were negotiated in a very frothy environment were all being re-evaluated in light of higher interest rates. So we saw some cancellations on that kind of stage. And that’s where the U.S. is right now.

On carbon neutrality

ZM: The move to carbon neutrality is going to be really complex, it’s going to be challenging. The key thing to keep in mind is there is no one standard solution. Because every economy is at a different stage of development, and they have different sources of CO2 emissions. And based on that, the policies they use will have to be different, right? And the challenges are apparent. On this globe we have a population of eight billion individuals. Of that, seven billion actually live in the developing economies and they only use a fraction of the energy which you and I, who live in the OECD economies, use. It is those other seven billion people on the planet, they’re going to set the speed of how energy demand grows, and the space at which we can actually transition. And for those economies, reliable and affordable is a lot more important than being sustainable. And that’s what makes transition extremely hard to do.

Developments in western Canada

ZM: The best news and probably the biggest news with relevance to Canada is takeaway capacity is finally arriving. We’re going to see significant additions to infrastructure both on oil and gas. On the oil side, Trans Mountain, it’s going to start up in Q2, so just a few months away, which is great because it diversifies a bit away from the U.S., which should reflect in higher prices for our oil. And on the gas side, TC energy, they’ve completed the coastal GasLink pipeline, and they’ve handed it over to Shell. So somewhere in 2025, we’re going to get 2 BCF [billion cubic feet] a day of export capacity off the west coast of Canada. So, overall, this should really be good news for Canada on both oil and gas.

Names she likes on the Canadian scene

ZM: The names we like are integrated oil sand companies. We like the Suncors [Calgary-based Suncor Energy], the Cenovus [Calgary-based Cenovus Energy] and the Imperials [Calgary-based Imperial Oil Limited] of the world. Within the E&P [exploration and production] space, we like [Calgary-based] Canadian Natural Resources, which is also an oil sand company, and we like Tourmaline [Calgary-based Tourmaline Oil]. I’m a fan of the oil sands. Like, we are very fortunate to have these long-life, low-decline geographically concentrated oil sand reserves. If these reserves were located in the U.S., there is no way the companies would not have developed them. We like the upstream because we can see take away capacity is going to come, which would help on Canadian prices. We like the downstream — that’s the integrated oils — because it adds a level of the resilience to cash flows. And, you know, these downstream assets are going to be profitable for a long time to come.

And finally, what’s the bottom line on investing in energy in the current moment?

ZM: The stocks have had a rally, a strong one, right? But there is a lot of ideologically driven noise in the market. And you often hear narratives of a fast transition and what happens is that there’s a lot of investors which don’t have a lot of conviction in this space. So what should investors keep in mind? Ignore the noise. Focus on the actual physical data. And look at what the companies in the sector are actually doing. We’ve actually seen the return of maybe some large-scale M&A in this space. Like Chevron-Hess [and] Exxon Pioneer. And that tells you what the companies are thinking. It tells you that they think the sector has a future, and they’re positioning themselves to thrive in it. So, this is an industry which still has decades of life ahead of it. They already have reduced — and they’re continuing to reduce — their cost structure. Their balance sheets are in way better shape than they’ve ever been before. And they remain committed to shareholder returns. So I guess the bottom line is don’t sell these stocks just yet!

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Zeba Mirza of Foyston, Gordon & Payne. Visit us 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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