As oil industry staggers on, CEO says Middlefield prefers to focus on companies with pipes in the ground
A lack of political leadership over pipeline capacity is a major turnoff for foreign investors, according to the CEO of Middlefield Capital Corporation.
Dean Orrico said his company has considerable expertise in the energy sector and is dismayed at the failure of successive governments to provide the infrastructure necessary to realize the optimal pricing for Canada’s energy producers.
The Canadian Crude Index was about US$20 yesterday, with the differential to WTI Crude around US$30 as the sector struggles to address oversupply issues. For this country, Orrico said it displays a blatant lack of foresight.
He said: “This isn’t like we woke up and realized we’ve got all this new oil production. We knew this was happening. It’s been under way for 20 years and we’re starting to see it and the fact we haven’t successfully been able to build new pipelines to take that new energy oil production and move it to the US or Asia has been a major problem.
“There are billions of dollars that have been foregone by energy producers because there’s no takeaway capacity.”
Paradoxically, as an investment firm, the lack of capacity works to its advantage because it knows the companies with pipes in the ground are winners.
Orrico said that’s why Enbridge is among its biggest holdings and why the firm continues to be viewed favourably. “It’s the largest oil pipeline in the world, certainly in North America, and its pipes are full, so that’s a good business to be in,” he said.
Orrico believes it will be at least 12-24 months before there is any additional capacity, one avenue being the replacement of Enbridge’s Line 3, which was approved in June and is expected to be completed by early 2020. It’s a welcome boost after a number of thwarted plans, including the Northern Gateway, Trans Mountain and Energy East.
He said those with a longer investment horizon can afford to wait it out but that Middlefield embraces firms able to survive in this tricky environment.
He said: “Patience is key. Right now the sentiment is so negative you’ve got to be a value investor with a longer-term investment horizon to be able to do this. We do own some energy producers but we’re identifying those companies that can really withstand this low-price environment, which may continue for a long while.”
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