National Post (National Edition)


Will Big Oil make up ground on Big Green?


CALGARY • After years as the favourite ite investment vehicle for funds seeking energy exposure, sure, Big Oil was dethroned by Big Green in a big way in 2020. 020.

The year saw the oil-andy oil-andgas industry shrink to historhist­oric lows on North American markets — in April, it made up just three e per cent of the S&P 500, a dramatic comethe comedown from the 15 per cent level at which ch it stood a deceen decade ago.

Many green energy inmeanwhil­e, investment­s, meanwhile, from electric-vehicle hicle makers to hydrogen-fuel-cell uel-cell produnewab­le producers to renewable power companies, had remarkable years. Shares es of Tesla Inc., for example, e, rose six-fold and the company mpany joined the S&P 500 this is month, while shares of B.C.-based C.-based Ballard Power Systems ms Inc., a hydrogen hydroa trailblaze­r, er more than doubled. Even renewables, the laggards in this group, jumped by more than 50 per cent.

However, as the calendar flips to 2021 and investors begin to scour for stocks that have the potential to rebound with the broader economic reopening, the out-offashion oil-and-gas industry suddenly appears poised to win back some attention from its sexier green counterpar­ts.

“There's no sector more on its knees than oil and gas,” said Laura Lau, senior vice-president and chief investment officer at Brompton Funds Ltd. in Toronto.

While Lau notes that there has already been a big “catch-up trade” since oil stocks bottomed amid pandemic lockdowns in the spring, the rollout of vaccines and reopening of economies has put the sector back on the radar for value investors.

“If we do have demand coming back next year — and I believe we will — and since they're very, very cheap, they do have the potential for good returns,” she said.

As for renewable power companies, which have trumped the oil and gas industry for space in investors' portfolios in recent years, Lau said there is a bull case for those companies, too, but “renewables are more of a long-term trade.”

Either way, oil-and-gas companies have their work cut out for them if they want to win the battle for investors' hearts and minds in 2021.

Many industries traded down in 2020, but renewables weren't one of them. Shares of Boralex Inc.,

Northland Power Inc. and Innergex Renewable Energy Inc. have all risen by 50 per cent to 60 per cent this year.

Tim Nash, who founded Good Investing, a Toronto-based financial planning boutique firm, said 2020 has been a “remarkable year” for green investing, but he still sees continued upside in the space for 2021 as government­s around the world push green stimulus packages and incoming U.S. president Joe Biden pursues a “build-back-better” platform focused on decarboniz­ing the U.S. economy.

“There is going to be a lot of good news on the green economy front in 2021,” he said. “That causes more momentum and more upward pressure on share prices as companies tend to benefit from that.”

Nash said he's looking at companies involved in energy efficiency that are poised to benefit from green spending, but haven't experience­d the same run-up in share prices as electric carmakers and renewable power companies.

However, Nash cautioned that many renewable power, solar panel and especially electric car companies that have “popped” this year “might take a little while to grow into their valuations.”

By contrast, many investors believe oil-and-gas valuations will need to grow into their income potential in 2021.

Many of the largest energy companies are still trading — even after a massive rally — near historic lows. Suncor Energy Inc., Canada's second-largest oil company, is still down 46 per cent for the year.

Investment bank Raymond James lists two oil and gas producers, ARC Resources Ltd. and Canadian Natural Resources Ltd., and one renewable power company, Boralex, among its “best picks for 2021.”

The bank's two oil-andgas picks are underpinne­d by an expectatio­n that commodity prices will rebound from the lows of 2020 and that a handful of producers are poised to massively benefit from such a rebound.

“We enter 2021 optimistic about a durable recovery in oil prices, with positive developmen­ts on the vaccine front offering line-of-sight to relative demand normalizat­ion over the ensuing 12 months,” Raymond James analysts said in a note, adding that CNRL is the lower-cost producer poised to generate the most cash flow after expenses in the industry next year.

Similarly, the analysts said ARC Resources was “in for the comeback” and would benefit as generalist investors return after years of shunning the sector. The bank said those returning investors would be looking for companies with the best balance-sheet metrics and ARC's position leads to an expectatio­n of “profitabil­ity better than its peers.”

Eric Nuttall, partner and senior portfolio manager with NinePoint Partners in Toronto, said investors are already returning to the oiland-gas space in large numbers.

Nuttall runs an actively managed oil-and-gas fund that has seen a net influx of $60 million this year. At the fund's low point in March, when oil-and-gas prices collapsed, his fund was worth $28 million, but, as of mid-December, that figure has grown six-fold to $175 million.

“Some of that is performanc­e and some of that is communicat­ing the trade,” he said. “I think we're entering into a structural bull market for oil and I think COVID has acted as an accelerant of trends that were already in place.”

The coronaviru­s pandemic has been a shock to the shale oil industry in the United States, which has been the main source of global oil supply growth for years, and where oil production is now sharply declining.

While shale oil production was ballooning in the U.S., Nuttall said, there were multiple years of underinves­tment in competing sources, such as offshore oil projects. That has set up a scenario where oil prices could rise to as much as US$60 per barrel in 2021. At that price, multiple Canadian oil producers will be able to generate billions of dollars in free cash flow.

“I struggle to see what can derail the bullish thesis, which is a dangerous place to be,” Nuttall said. “But I challenge myself all the time and I'm struggling to come up with something.”

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