Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive, and powered by Canada Life. For today’s Soundbites, we talk about Canadian energy with Zeba Mirza, a senior research analyst with Foyston, Gordon & Payne. We talked about stranded assets, government policy, and why she thinks Canada is in a great position to benefit from changing approaches to energy production and consumption. And we started by asking about Canada’s potential role in helping Europe through its current energy crisis.

Zeba Mirza (ZM): It is disappointing, but almost two decades of bad policy means that there isn’t anything that Canada can actually do. And it’s really sad because we are the fourth largest oil producer in the world. We have the third largest oil reserves in the world, but our pipelines are full. We’ve had only two pipeline additions in the last 10 years. So, we had the base Keystone, which came online in 2011. And then we had the Enbridge Line 3 expansion which happened in 2021. We cancelled Northern Gateway in 2016. We cancelled Energy East in ’17. Keystone XL was cancelled 2021. So, the only new pipeline expansion we’re building is the Trans Mountain expansion, and that’s not coming online until late ’23, or early ’24. And that would have shipped oil to Asia, which would have freed up a lot more oil to go to the EU. But until that’s built, we can’t send more oil anywhere.

Why LNG production is so delayed

Our northeast B.C. porting assets are among the most cost-effective supply there is globally. But we don’t have an operating LNG terminal in place. Shell is building Phase 1 of LNG Canada, but look at the hoops they’ve had to jump through, right? Because they proposed the project in 2012. They got approval and they took FID [final investment decision] actually in 2018. And it will be 2025 before we actually see production.

How energy and ESG investing is changing

ZM: The next 10 years will not be like the last 10 years. A decade of underinvestment has hit global spare capacity. We do not have any. Plus, I think what we’re seeing is a seeing is a seminal change in Russian oil production. It has likely hit the peak, and it is now going to be declining. This is a capital-intensive industry. It takes a lot of cash, and it takes technology to produce that oil. And the big western companies have all withdrawn from that area. So, the truth is I do not expect ESG pressures on the sector to abate, but I do think investors are now going to be a lot more pragmatic. I think the war has demonstrated that it is going to be really hard to replace oil and gas in the short term. And that’s why I think we’re seeing a lot of smart investors, like Berkshire Hathaway, big pension funds like Ontario Teachers, saying that they’re open to investing in commodities. So, I really think we should want resource exposure in our portfolios. And I mean energy exposure.

Whether oil prices are working against Canada

ZM: We complain about energy prices for North America. But we actually have the cheapest energy in the world. Canadian oil companies are long-life, low-decline assets. And once the assets are built, they have very low sustaining capital requirements. They generate more free cash flow than most other hydrocarbon assets. The sector doesn’t need $100 per barrel. They generate significant free cash flow at $70, at $80. And we’re actually seeing this inflection. Like, all the free cash flow we got last year actually went to balance sheets. But 2023 will be a year of inflection, where we’ll see increasing free cash flow come to shareholders. And you have to keep in mind that energy actually gives you a very effective hedge against inflation. So, if you’re looking in terms of investment options, I think Canadian energy, and I think the Canadian energy industries, offer great value actually.

And, finally, where the investment opportunities are.

All I would say is, like, when I look at sectors, I think Canadian energy and I think the Canadian industries as a whole are very well positioned. And I see the valuation discrepancy. We’re cheap compared to the U.S. We offer twice as much in dividends as the U.S. We’re more cash rich than the U.S. So, honestly, I think right now is the best time to invest in Canada.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Zeba Mirza of Foyston, Gordon & Payne. Join us every Wednesday at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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