Suncor's base plant with upgraders in the oil sands in Fort McMurray, Alta., on June 13, 2017.JASON FRANSON/The Canadian Press
On numbers alone, oil and gas stocks are hard to argue against right now. Crude prices have topped US$90, global supply is tight, demand is strong and years of debt reduction and cost cutting at the company level has the oil patch generating plenty of cash.
The stocks themselves are hot – up more than 20 per cent in the past three months at the sector level on the TSX.
But Canadian oil and gas remains a tough sell for investors, big and small. For most of the past year, they have been pulling money out of Canadian energy ETFs, with August seeing a record monthly outflow of more than $500-million. According to some energy-fund managers, the sector is being widely ignored by the investing public.
There are lots of reputational issues at play, not least of which is the sector’s carbon footprint. In the world of environmental, social and governance, or ESG, investing, the Alberta oil sands continue to be a pariah. In a summer filled with natural disasters and alarming climate-related headlines, the urgency surrounding a global transition away from fossil fuels has only grown.
“On the institutional side, there’s a recognition of the fact that ESG pressures are not going away,” said David Sherlock, chief investment officer at SAGE Connected Investing in Calgary.
“As an investor, you’ve always got that stacked against you. And it makes you think there are easier ways to make money.”
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Years of poor stock performance did a good job of souring many investors on the oil patch.
In the span between the global financial crisis and the COVID-19 pandemic, the Canadian energy sector was a great place to lose money. The commodity supercycle came to an end, the U.S. shale oil boom pushed the global crude market into a state of indefinite oversupply and a shortage of pipeline capacity in Canada crushed domestic oil prices. The pandemic then generated the bizarre spectacle of negative oil prices for the first time in history.
The Canadian oil and gas sector emerged from the worst of the pandemic leaner and more disciplined. Gone was the rampant drilling and excessive growth of the boom years, replaced by paying down debt and returning money to shareholders.
In this incarnation, some producers could be profitable even if West Texas Intermediate fell to as low as US$50 a barrel. Over the past year, that benchmark has rarely dipped below US$70, and currently sits at more than US$90.
“I don’t think people appreciate the quantum of free cash flow being generated,” said Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners. “We do not need a higher oil price for these companies to do unbelievably well.”
Energy has been one of the best performing sectors of the pandemic era. The iShares S&P/TSX Capped Energy Index ETF is up by 283 per cent over the past three years – more than 10 times the return posted by the S&P/TSX Composite Index.
Over that time, the Ninepoint Energy Fund has been the country’s top-performing mutual fund, according to Morningstar data up to the end of August.
“You would think performance alone would be enough to attract people,” Mr. Nuttall said. “ESG and divestment and the government’s anti-sector stance has created so much noise, that it hasn’t allowed as many people to see what we see.”
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The calls to withdraw financial support for fossil fuels are getting louder. This week, a group of Hollywood A-listers urged the Toronto International Film Festival to cut ties with the Royal Bank of Canada RY-T over support for the oil and gas industry.
Earlier this year, a group of environmental organizations identified Royal Bank as the world’s largest financier of fossil fuels, with US$42.5-billion in funding for oil and gas projects last year.
The big banks are also facing pressure from some of their own investors.
“We’ve engaged the banks on what they are doing around their net-zero targets and how they invest or lend in the fossil-fuel community,” said Joe Reid, vice-president of wealth management and impact investing at Vancouver City Savings Credit Union, a member-owned co-operative.
As of 2019, all investment funds managed by Vancity became fossil-fuel free.
Investors have lots of reasons beyond the principled to divest of fossil fuels, said Mike Thiessen, co-CIO and chief sustainability officer at Genus Capital Management. The oil and gas industry’s fortunes are highly volatile, and subject to a potent cocktail of risks, Mr. Thiessen said.
“Do you really want to take on all the legal and geopolitical risks with oil and gas? A lot of our investors are saying ‘no.’ ”
And yet, when energy stocks are sizzling, it can be difficult for many investors to pass up those returns. To that end, Mr. Thiessen said that alternative energy names can help fill the gap. “They are often correlated with oil and gas. When energy prices are really high, people invest more in energy efficiency.”
But it’s not a perfect solution. The iShares Global Clean Energy ETF, which serves as a proxy for renewables, is down by about 5 per cent over the past three years – the same timeframe that has seen the Canadian energy sector nearly quadruple.