Investors are returning to the oil and gas sector after a long period of industry ‘slump’

Some investors who had pulled out of the oil and gas sector in recent years have started to return.

Among them is Calgary-based wealth portfolio manager Martin Pelletier, who said his company left the oil and gas sector « significantly » in 2015 before returning about a year and a half ago.

« I’ve been on the sidelines for a good chunk of the last…four or five years, I guess, » said Pelletier, of wealth management firm Wellington-Altus Private Counsel, which manages more than $20 billion in assets. ‘assets.

Pelletier said he was drawn in part by the rebound in oil prices and what he described as a « precarious » supply situation.

« [That] made it a much more attractive investment environment,” he said.

These days, huge profits and a renewed interest in energy security sparked by the war in Ukraine are the two main reasons for the renewed interest of investors, after several years of poor financial returns and growing concerns about climate change.

« Any investor who hasn’t been in the race here in oil and gas…there’s a bit of a fear of missing out, » said Jeremy McCrea, managing director of energy research at Raymond James.

Year to date, Cenovus shares are up about 50%, Canadian Natural Resources shares are up 37% and Suncor shares are up about 34%.

By comparison, the S&P/TSX Composite Index is down about 12%.

Michael Tims, vice chairman of Matco Investments Ltd., said this year marked a change from a long period of « slump » after the 2014 oil crash, punctuated by a sharp decline in prices at the height of the pandemic in 2020.

« As of June 2022, we weren’t quite back to 2014 highs, but we were certainly above all-year levels from 2015 to present, » he said.

Since June, Tims noted that energy stocks have fallen slightly. The difference, he says, is that for a long time the sector has been out of step with the rest of the market.

“Now we see it all rolling back simultaneously [amid] worried about the recession, » he said.

What to do with the renewed investment?

Part of what makes the current moment different from previous boom times is that, while companies are profiting from their stock prices, they generally aren’t investing a lot of money in capital expansion.

Instead, Tims said many exploration and production companies are expected to make about three and a half times more cash than they plan to spend on capital.

« This is a sea change for the Canadian oil and gas industry, » Tims said.

Shrunken from previous boom and bust cycles, McCrea thinks companies are trying to be more cautious this time around.

« It’s this kind of thing, ‘Don’t blow it up,’ here, » he said.

The current regulatory environment also plays a role, he said. McCrea said oil sands producers might be reluctant to spend years developing a new project when, for example, the federal government wants all cars sold by 2035 will be zero emissions.

« There are a lot of regulatory headwinds that are keeping just about every producer from wanting to expand their spending programs to increase production, » said McCrea, who said they’re instead maintaining production with existing facilities.

« As a result, your profits then go up a bit, which can then be turned into dividends and buybacks and, frankly, that’s kind of what a lot of these investors here are looking for. »

The International Energy Agency said last year that no new oil and gas fields, or coal mines, are possible if the world is to achieve net zero greenhouse gas emissions from here 2050.

For many years, investors around the world have been warned pay attention to climate risks due to the potential of stranded assets and the impact on global warming. This is part of the reason why dozens of banks, pension funds and other financial institutions have decided to strip of the fossil fuel industry.

For his part, Tims hopes the industry should use this moment to make a big push to meet its environmental, social and governance (ESG) goals.

“I think this is a window of opportunity,” Tims said, to reduce methane emissions, clean up orphan wells and dedicate resources to carbon capture and storage.

He thinks it will also lead to better long-term returns, as investors differentiate between companies that follow the “right path” and those that resist.

« The right goal is not to be anti-revival, » he said. « The right goal is to do the best the industry can do on all of these topics. »