Eric Nuttall explains why he’s sceptical about new pipeline construction and how Alberta sovereignty could improve negotiating position
As recently as February, most Canadians could be forgiven for assuming a new party would be in government by now. Opinion polls had the Conservative party firmly in majority territory and many energy investors were relishing the prospect. A party that has been unabashedly friendlier to the Canadian oilpatch was seen as a welcome catalyst for new infrastructure development, exploration, and production increases. However, that assumption was undone by the sudden resurgence and eventual victory of the Liberal party under Prime Minister Mark Carney. While that party had long been decried as an adversary of Canadian energy, their recent victory came with a notable shift in tone. PM Carney repealed the consumer carbon tax before calling the election and on the campaign trail he and his party made some noise about a long-desired east-west pipeline that would bring Alberta oil to Central and Atlantic Canada.
Eric Nuttall is somewhat sceptical that this rhetoric will translate into action. The Partner and Senior Portfolio Manager at Ninepoint Partners explained that the Liberal’s promise of new pipelines and commitment to maintaining bill C-69 are incompatible. He believes that while that bill remains in place, private pipelines will not be built in Canada. He explained, though, that the domestic worst-case scenario for energy stocks is something like a maintenance of the status quo. He outlined how those domestic factors intersect with global market trends and highlighted where he now sees opportunity and potential upside in Canadian energy.
“It’s too early to tell what a Carney government means for Canadian energy stocks. I’m cautious to use what was said on the campaign trail because that could turn out to be different from reality,” Nuttall says. “Our base case is assuming the status quo remains with lip service and no action. You’ll have a government that continues to penalize the sector that that means we will be at our export capacity by 2027, which will limit the sector’s ability to grow. By that time, though, we think there will be a combination of high natural gas and oil prices, so companies will be awash in cash flow.”
While Carney’s post-election cabinet has not yet been announced, Nuttall believes he will likely keep Johnathan Wilkinson in place as natural resources minister. Nutall describes Wilkinson as occasionally “patronizing” towards the sector, noting past statements about peaking demand for oil and a global demand for natural gas set to decline by 2030, which Nuttall says is wrong. Wilkinson, he argues, does not present a positive message to the sector.
Domestic policy, however, is only one factor folded into Nuttall’s outlook. He highlights a set of global factors currently dragging on the overall outlook for oil stocks. First and foremost is US trade policy, which has been destabilizing and unclear enough for analysts to cut oil demand growth forecasts for 2025 in half. In addition, we’ve seen a pivot by OPEC+ to bring more supply to market, largely as a means of punishing Kazakhstan, Iraq, and Russia for deviating from OPEC+ agreements. Those factors have Nuttall revising down his forecasts for oil in the short-term. He notes that his fund is now 65 per cent weighted towards natural gas as the short-term thesis is better. He remains constructive on oil in the medium to long-term, however.
One of the stories driving that constructive longer-term outlook is what Nutall believes to be the peaking of US shale oil production. A slowdown in what has been the most meaningful source of supply growth in the past decade should have a seismic impact on the whole sector. Moreover, he believes that many of these US shale companies will begin looking at Canada for new supply, resulting in an influx of M&A activity in the Canadian energy space.
Looking again at the possibility of Canadian east-west pipeline construction, Nuttall notes that while Bill C-69 limits the prospects for private pipeline development, we could see the Federal government taking on the project, possibly as an incentive for Canadian energy names to proceed with carbon sequestration efforts. He notes, however, the political issues that emerge when trying to get a pipeline built to or through the province of Quebec.
Another domestic political trend that could play a role in Canadian energy stocks is the growing popularity of the Alberta sovereignty movement. While the prospects of that movement remain highly unknown at this point, Nuttall notes that it could improve the province’s negotiating stance vis-à-vis federal involvement in its natural resources sector.
As advisors look to the new government, global trends, and the prospects for Canadian energy, Nuttall notes that while some short-term headwinds may exist, we are far from a worst-case scenario for energy names that have spent much of the past decade improving their balance sheets and making themselves more shareholder friendly.
“The fear of a Carney government, with what I know today, the impact on the oil sector and energy sectors is pretty muted,” Nuttall says. “At worst it means fewer pipelines, it means status quo. It means more free cash flow because companies won't be spending money to grow, and it means more share buybacks.”
