Partner and Senior Portfolio Manager explains how President Trump has undermined investor sentiment in oil and gas, highlights sources of reassurance
Canadian energy investors can be forgiven for feeling a bit of Trump-induced whiplash. The US President is imposing ten per cent tariffs on Canadian energy imports while posting in the middle of the night that he wants the Keystone XL pipeline built “NOW.” The result of this uncertainty has been a significant pullback in major Canadian energy names as investors weigh the myriad uncertainties facing the sector.
Eric Nuttall explains that energy investor sentiment has been weighed down by the mixed messaging out of Washington. The Partner and Senior Portfolio Manager at Ninepoint Partners outlined how the prospect of tariffs, as well as mischaracterizations of what President Trump can actually achieve in energy markets, has caused this pullback. He noted some of the policy decisions and infrastructure investments that he believes Canada needs now, and highlighted how advisors can square weak sentiment with stronger fundamentals for their clients.
“What’s coming out of Trump is counterproductive,” Nuttall says. “You can’t tariff Canadian oil and then say ‘we need the oil build a pipeline,’ and then turn around and say, ‘actually we don’t need the oil because drill baby drill.’ But you’re growing production in light oil and not heavy oil, and you’re not growing enough because the pace of growth last year was the lowest since the rise of US shale. There’s a lot of confusing, mixed messaging.”
Canadian internal dynamics are adding to the uncertainty for energy, too. Nuttall notes that despite some overtures towards pipeline development, the prospect of Prime Minister Mark Carney does not necessarily buoy sentiment in Canadian energy. Questions of who would be in cabinet and what that government’s energy policy might be also add uncertainty to the picture for Canadian energy stocks. He notes that Canadian energy policy never accounted for limited access to US markets and argues for more pipeline development to give Canadian oil access to other markets. While those large questions of Canadian policy persist, though, Nuttall also has to confront what he sees as a mismatch between how he and the market see the energy sector.
Markets, Nuttall says, are continue to believe that Trump can simply say ‘drill baby drill’ and US producers will voluntarily ramp up production, crashing the oil price. Add to that, Nuttall notes that much of US shale production appears to be approaching signs of maturity, with less room to grow production from existing wells. Those same investors, he says, believe that Trump can call up the Crown Price of Saudi Arabia and get them to break their OPEC commitments, ramp up production, and crash the global oil price. The picture Nuttall sees is one where the US market remains heavily reliant on Canadian oil.
“There’s this believe that [Trump] is some great dealmaker and he has a master plan to get Saudi Arabia to ‘bend the knee’ and manipulate the oil price,” Nuttall says. “I think his ability to do so is much much less than what consensus currently believes.”
Despite the necessity of Canadian oil to US markets, and the President’s late-night exhortations, Nuttall thinks that the Keystone XL pipeline project will not be revitalized. He notes that TC energy has since spun off their oil pipeline division and the natural successor has stated, explicitly, that they’ve moved on from this project. At a time when the President is imposing massive tariffs on energy imports Nuttall asks who would want to take on a huge and expensive infrastructure project like Keystone.
Despite the headwinds that tariffs will place on Canadian energy companies, Nuttall accepts that the uncertainty of US policy plays more of a role in depressed sentiment. If there is some kind of resolution to this issue, he says that Canadian energy stocks could eventually rally ten per cent. Despite the tariffs, the prospects for Canadian energy could improve as the resultant hits to the Canadian dollar would improve margins for energy exporters significantly. Sentiment is currently held back by the lack of clarity, coming down on an investor base that is already “exhausted,” Nuttall says.
Amid that weak sentiment, Nuttall is focusing on corporate fundamentals. Using the current oil price he notes that investors can buy most Canadian energy names at 10 to 15 per cent of free cash flow yields, a valuation he calls “incredibly attractive.” He stresses that the major Canadian energy names have no debt, 50 years of inventory, and a share buyback rate of around ten per cent per year. The sources of negative sentiment, he notes, don’t square with fundamentals of low supply, growing demand, and strong balance sheets among Canadian producers. As advisors look at those long-term trends, Nuttall insists that there is more of a buying opportunity for those able to see through the valley.
“You've got a sector that is, I think, deeply out of favour, with strong underlying fundamentals and the solution has been meaningful share buybacks,” Nuttall says. “There is very clearly an absence of natural buyers of these stocks. So companies are taking advantage of depressed share prices, robust free cash flow, and using that on a daily basis to buy back their shares and retire them. And so with every passing day and week and month and quarter and year, the remaining shares become more and more and more valuable over time.”
