Biden's anti-oil policies may be a boon

Stable prices, more market share

Last week’s inauguration of U.S. President Joe Biden and his decision to revoke the presidential permit for the Keystone XL pipeline and temporarily ban drilling on all federal lands sends a clear message of what’s to come when it comes to U.S. energy policy. In our opinion, the response from Justin Trudeau — which included the “build back better” slogan that Biden used prominently in his campaign — was a sign that the PMO agrees with making climate change the No. 1 priority when it comes to rebuilding the economy. There is no denying the tremendous momentum behind the movement seeking to make the global economy cleaner and greener. Simple evidence of it can be found in the shares of Tesla Inc., a company that despite having less than one per cent of total auto sales is now worth more than the top seven auto manufacturers combined.

For those trying to fight this step change head-on, consider the estimated $40 billion in losses last year incurred by those who shorted Tesla shares, in the belief that the EV market and the stock had gotten ahead of itself. We think a much better strategy is to adapt to the tsunami of climate-change policy that is about to hit shore instead of standing in front it. That can mean looking beyond the headlines. While the Keystone cancellation was certainly a blow, Biden’s decision to go full nuclear on his own oil industry may end up being a net positive for Canada, freeing up market share for the million barrels a day of expected growth from our sector over the next two decades.

Fortunately, this growth is currently fully supported by existing pipelines including TransMountain and Line 3. The key looking forward is how to add value in this environment.

The process of adaptation had already started following the oil price crash of 2014, which incentivized our industry to become more efficient. This has led to a focus on consolidation and cost control resulting in an impressive improvement not only in operating efficiencies but also carbon emissions.

As a result, we see the energy sector being well on its way to developing the dividend-focused oligopoly model currently in place in other Canadian sectors, including banking and telecommunications.

Another positive is we expect a more stable oil price environment going forward.

We believe the ongoing transition to renewables and clean technology will take a lot longer than many expect and as a result demand growth for oil will continue for some time with developing regions such as China and India leading the charge.

More so, we see a significant impact on the supply side, especially within the U.S. shale industry, which is important given this region's explosive seven-million-barrels per day of growth over the past decade that contributed to an oversupplied global oil market.

We believe that Canada's biggest competitor could soon be facing significant regulatory constraints paired with an exodus of the capital required even to sustain production.

This would result in not only an increase in market share for our producers but also a more balanced supply situation and therefore more stable oil prices.

We think this is the level of certainty investors have been waiting for which would fit very well within a dividend-based model especially one offering high yields in a low-interest-rate environment. For those wondering the kind of upside there could be, simply look at oil producer share prices, as represented by the Capped Energy index, which is down 35 per cent over the past five years compared to oil prices that are up 65 per cent.

Finally, governments will also have to adapt by looking at ways to better harvest this more stable cash flow from oil and gas royalties and then identify how to redeploy it into those areas of the economy offering higher levels of growth. This sure sounds like a great way of building back better not only for oil companies and their investors but also all Canadians.

Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/ oversight and advanced tax and estate planning.