Portfolio manager draws from well-known quote to emphasise why Canadian oil sector remains a good long-term opportunity
The Canadian energy is beaten and bloodied right now. So, if you subscribe to the famous quote of Baron Rothschild that the “time to buy is when there's blood in the street”, now is your moment.
In the second part of his interview with WP, Nick Piquard, portfolio manager at Horizons ETFs, builds on his analysis in part one, which took in historical oil pullbacks and the tactical machinations of Saudi Arabia.
To enter the sector now, he said investors should look at an oil ETF, which can give you broad exposure of the best performers. It means you don’t have to worry about execution, balance sheets or firms going bankrupt. Meanwhile, if you’re cherry-picking companies, there is more potential for upside because the price has dropped so far. Piquard said the key is knowing which ones have the means to weather the storm.
“There's going to be at least a one-year period where they're going to struggle and a lot of them might go bankrupt,” he said. “People are going to have to cut back production, so you want to be able to buy companies that have clean balance sheets with not too much debt, and even if they cut capital expenditures, they have lower decline rates.
“One of the big problems with shale is as soon as you cut capital expenditure, your production profile goes down significantly. And then if you have a lot of debt, then it becomes a lot harder to service.”
Some companies have hedged their 2020 prices using oil futures, which could help investors weather the storm over the short term. Piquard added: “If you believe like I do, that oil prices will recover but might take maybe a couple of years, then if you have a cushion over a one-year period, you can benefit from that cushion over the first year and then benefit from higher prices after that.”
If you already own these stocks, resist the urge to panic sell and look at the long-term picture. The portfolio manager believes a lot of the bad news has been priced in, so if you believe we will still be using fossil fuels in 10 years, then it’s a time to enter the sector or even strengthen your position.
He said: “Everyone agrees that over a long period of time, because of the environment, we'll be trying to use less fossil fuels. Is it a 100-year time frame? Is it a 40-year time frame? Is it a 20-year time frame? “If you think that we’re still going to need fossil fuels over the medium term, then the price now is just too low to make sure that we have enough, so the price has to recover.”
