Good time for Cana­dian en­ergy in­vest­ments

Stage is set­ting for Cana­dian oil prices to re­cover

Ottawa Citizen - - FINANCIAL POST - Ma Pe rt i n lletier Martin Pel­letier, CFA, is a port­fo­lio man­ager at Cal­gary-based TriVest Wealth Coun­sel Ltd.

This past week­end I was one of the guest speak­ers at the Global Chi­nese Fi­nan­cial Fo­rum in Van­cou­ver, hosted by NAI In­ter­ac­tive. I was rather im­pressed with the at­ten­dance, which I was told was in ex­cess of 1,000 Chi­nese in­vestors, but what caught my eye was the large amount of in­ter­est in Canada’s min­ing sec­tor and the in­vest­ment mer­its of this coun­try’s en­ergy sec­tor.

Cana­dian en­ergy has a core strate­gic value that is sim­ply not be­ing re­flected in the cur­rent pub­lic mar­kets, mak­ing it one of the best in­vest­ing op­por­tu­ni­ties I’ve seen in more than a decade.

Given all the neg­a­tive sen­ti­ment sur­round­ing Cana­dian heavy oil th­ese days, now might be the op­por­tune time to add ex­po­sure.

Re­fin­ery out­ages, sup­ply growth and pipe­line di­vi­sions con­tinue to sup­port record- high pric­ing dif­fer­en­tials, with West­ern Cana­dian Se­lect ( WCS) crude oil prices trad­ing at a more than US$40 per bar­rel dis­count to its heavy oil peer, Mex­ico’s Maya blend, de­spite their sim­i­lar grade qual­ity.

Many have for­got­ten that Canada of­fers ac­cess to wellde­vel­oped world-class en­ergy re­sources. Glob­ally, this coun­try is the third-largest nat­u­ral gas pro­ducer, sixth­largest crude oil pro­ducer and fifth-largest en­ergy pro­ducer.

This is rather im­por­tant con­sid­er­ing that only 7% of the world’s es­ti­mated oil and gas re­serves are in coun­tries that al­low pri­vate in­ter­na­tional com­pa­nies free rein, ac­cord­ing to con­sul­tant PFC En­ergy.

Canada is also one of the few places in the world where there is a fair roy­alty and tax­a­tion regime, a trans­par­ent en­vi­ron­men­tal and drilling reg­u­la­tory frame­work and ac­cess to a fan­tas­tic data­base of drilling ac­tiv­ity and well and seis­mic data.

In ad­di­tion, Canada of­fers lead­ing-edge tech­nolo­gies that are very at­trac­tive to coun­tries such as China that hold large un­de­vel­oped shale re­source po­ten­tial but are years away from de­vel­op­ing them due to a lack of ex­per­tise and tech­nol­ogy.

There­fore, it shouldn’ t be sur­pris­ing when such coun­tries un­der­take smaller cor­po­rate ac­qui­si­tions and joint ven­tures as a means of ex­pe­dit­ing the learn­ing curve and ex­port­ing Cana­dian tech­nol­ogy and ex­per­tise back home. A great ex­am­ple of this is Sinopec’s ac­qui­si­tion two years ago of Day­light En­ergy Ltd.

How­ever, while for­eign takeovers have been priced at 60% to 100% pre­mi­ums, in­vestors in the pub­lic mar­kets con­tinue to push the val­u­a­tions of many Cana­dian oil and gas com­pa­nies down to near their 2009 fi­nan­cial cri­sis lows.

We think this rep­re­sents a great op­por­tu­nity to take the other side of that trade for a cou­ple of rea­sons.

For one thing , it can be used as a cheap hedge against in­fla­tion if in­vestors are wor­ried about the po­ten­tial fall­out from all the money print­ing by cen­tral banks. Cana­dian oil com­pa­nies are an in­ex­pen­sive way of own­ing oil as many com­pa­nies are re­flect­ing a 25% to 30% dis­counted oil price in their cur­rent val­u­a­tions.

Se­condly, we think there is near- term up­side once in­vestors re­al­ize that the neg­a­tive head­line re­port­ing about Canada’s lack of pipe­line ca­pac­ity is overblown. The Se­away pipe­line has been re­versed to al­le­vi­ate the glut at West Texas, Key­stone is look­ing likely to be ap­proved, and some of the re­cent re­fin­ery out­ages will be re­solved.

This sets the stage for Cana­dian oil prices to re­cover.

That said, Cana­dian light oil prices are cur­rently far­ing quite well and not suf­fer­ing to the same ex­tent that heav­ier blends such as WCS are. Strangely, for some rea­son this is not be­ing re­flected in the re­cent share price per­for­mance of light oil and heavy oil pro­duc­ers.

Cana­dian oil com­pa­nies are an in­ex­pen­sive way of own­ing oil

What kind of near-term up­side is there? We es­ti­mate there could be as much as 25% from cur­rent lev­els should there be a mean-re­ver­sion to his­tor­i­cal mul­ti­ples.

We think there is even more up­side in nat­u­ral gas, but it is for the pa­tient longer-term in­vestor.

Pri­vate eq­uity and sta­te­owned en­ter­prises have been strate­gi­cally po­si­tion­ing them­selves by ac­quir­ing large gas re­sources in west­ern Canada. They have been mo­ti­vated by Cana­dian gas prices that are at $3 per mcf com­pared to US$10 to US$15 per mcf in Europe and Asia. This gap will nar­row fast upon the build-out of North Amer­i­can ex­port ca­pac­ity over the next five or so years.

Fi­nally, the nice thing about the sec­tor at the moment is that in­vestors can be paid quite hand­somely while they wait for a re­cov­ery. The oil and gas com­pa­nies that pay div­i­dends, in­clud­ing even the less risky se­nior pro­duc­ers such as En­cana Corp. and Cana­dian Oil Sands Ltd., are yield­ing on av­er­age any­where from 4% to 10%, which are his­tor­i­cal highs.

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