Demand outlook remains bullish following industry’s 59% gain last year, insists CEO
Last year, the energy sector came up as a bright spot for investors, especially against the broader backdrop of losses across the equity market. And while it may be too much to expect those same eye-watering returns for 2023, the thesis for energy exposure in portfolios remains strong, according to one industry executive.
“Energy exposure has always been a good bet, and it remains that way today,” says James Hill, CEO of MCF Energy. “To put things into perspective, last year, the sector was up 59% when the S&P dropped almost 20%.”
The outperformance of the energy sector, Hill said, can be attributed to the ubiquity of oil and gas as an input to everyday necessities, from heating to manufacturing lipstick. And even as carbon-heavy methods of energy generation like coal burning may be on their way to obsolescence, more palatable alternatives – particularly liquefied natural gas – continue to enjoy support for pro-development as an essential source of power.
“Energy was one of the top-performing sectors in 2021 and 2022, and LNG companies specifically have displayed strong growth amid volatility in global oil markets,” Hill said. “The European government recently labeled LNG as 'green,’ given we are still a few decades away from a full shift to renewables.”
Notwithstanding slight pullbacks and minor corrections, Hill says the growth trajectory in energy remains clear. Sentiment on future oil demand remains bullish, he adds, given the emergence of China’s economy from its COVID-19 lockdown regime.
The supply side of the investment case for oil also took a constructive turn recently. CEOs at an oil and gas conference in Toronto last week reportedly shared a “buoyant” and “extremely positive” mood as a surprise production cut by OPEC plus had just sent oil futures surging.
The 23-nation group, which includes Saudi Arabia and Russia, announced the voluntary cuts of 1.15 million barrels per day as a “precautionary measure” meant to stabilize the market. The cuts, which start in May, add to another planned 2-million bpd cut that had taken effect in November.
Concerns over bank failures in the U.S. a few weeks ago had dragged oil prices down to the mid-US$60 range. But following the unexpected move by OPEC and its allies, WTI prices surged above US$80 for the first time since January, and attendees at the conference were abuzz with talk of oil prices potentially returning to the triple digits by fall.
“A key consideration to be aware of is Canada’s carbon tax. This fee, tacked on to the price of gasoline and natural gas to help bring down CO2 emissions, was set in full force earlier this year,” Hill added. “This tax has implications on the price of oil which could cause a forced price hike, especially as the economy continues to shuffle.”
Still, Hill cautions, not every energy company’s sails will be set to catch the tailwinds blowing in favour of the sector.
“From an investment identification standpoint, many of the fundamentals remain true,” Hill said. “It's important to invest in companies that demonstrate value and hold strong fundamentals. Conducting a thorough due diligence check to ensure they’re in a solid financial position and have an experienced management team should not be taken lightly.”
The energy market typically fluctuates to a lesser degree compared to other sectors, Hill added, with oil and gas stocks potentially producing significant capital gains and share price appreciation over reasonable timeframes. With many portfolios still recuperating from last year’s carnage, he argued, energy is among the more reliable industries to gain exposure to.
“The outlook for the energy sector in 2023 remains strong,” Hill said. “Predictions for a recession still remain, but the forecast is more mild than previously thought, indicating resilience in this sector.”
