Short-term contracts have been pummelled because of oversupply but PM tells WP he remains optimistic of long-term opportunities
If U.S. President Donald Trump had a dollar for every “unprecedented” spoken or written in the past six weeks, he could probably keep the oil industry afloat out of his own pocket.
Of course, for the energy sector these truly are times like no other. Never before has the price of U.S. crude dropped below zero, as it did for the May contract on Monday.
Oversupply and lack of storage space has crippled the industry as demand dips amid a global pandemic that governments are struggling to contain.
Nick Piquard, portfolio manager at Horizons ETFs, compared it to negative interest rates in that no one thought it was possible until it happened. For him, as uncertain as the future is, the oil situation has reinforced his belief that investors should see the sector as a longer-term, five-year opportunity.
While hinging on some kind of COVID-19 resolution, he added that the market is offering its own insight.
“Look at what oil stocks did yesterday and Monday, even though oil prices hit all-time lows. The May contract went negative and the June contract got impacted but these were short-term oil contracts.
“If you look longer term, [the market] is also down but not as much. If you look at oil stocks, the S&P/TSX energy index in Canada on Monday was down only a couple of per cent and I think yesterday was down again but only maybe 1%.
“You want to have this as a long-term phenomenon. If you look at oil stocks, they might provide a better way to play that. There is some risk, of course, because they have debt and they have leverage, and you want to make sure that whatever company you're looking at can really survive in the short term.”
One thing that is expensive right now is storage but oil stocks have it in the ground. By cutting back production and keeping it in the ground - free storage - that gives them a better chance of surviving the crisis.
Piquard added: “When things get back to normal, and I'm not sure what normal looks like at this point, people are going to be using more oil and gas than they are today.”
Of course, if COVID-19 drags on and lockdowns persist, it will impact oil stocks. But Piquard said that the TSX energy index is still up almost 50% from where it was last month.
The portfolio manager highlighted a Benjamin Graham quote to illustrate the point: “In the short term, markets are a voting machine but in the long term, they're a weighing machine.”
