The Trans Mountain pipeline green light is little more than an incremental step forward and there remains “muddy waters to wade through” for the Canadian energy sector, according to a portfolio manager.
Prime Minister Justin Trudeau this week approved the expansion of the crude oil pipeline it bought last year in a move that offers hope for the country’s beleaguered energy industry but will anger environmental and Indigenous groups.
Legal challenges are expected to a project that would triple Trans Mountain’s capacity to carry 890,000 barrels a day from Alberta’s oil sands to B.C.’s Pacific coast.
Mike Dragosits manages the Harvest Energy Leaders Plus Income ETF at Harvest Portfolios and was formerly commodities strategist at TD Securities. He told WP that talk of getting shovels in the ground this year was more positive but that the overall picture remains cloudy and that there are still issues to work through.
He said: “There is still a bit of a muddy picture. The service date is not until 2022 or 2023, there is an election coming up nearer to the end of the year and this [approval] doesn’t preclude the fact there could be environment protests or further court challenges.”
He also pointed to the C-69 and C-48 Bills – an environment assessment process and a restriction on tanker traffic on the west coast of BC respectively – as additional roadblocks.
“It’s a positive step but marginal at this point,” he said. “We are very much in a wait-and-see mode from a foreign investors’ perspective.
“The reaction in the Canadian energy space has been pretty subdued. If we had seen a huge inflow of money, there would be more reaction in the stock prices but I think we still need more clarity about what this means for energy policy in Canada.”
So while a glimmer of light shines through for the glass-half-full investor, nothing has altered Harvest’s energy fund philosophy. Dragosits told WP it wants to be in the dominant large cap names that have global diversification and the ability to insulate investors from many of the regional risks.
These companies include household names – the likes of Royal Dutch Shell, BP and Conoco Phillips – that have the ability to progress through this cycle unscathed.
He said: “They also have economies of scale, lower costs and hopefully better balance sheets and steadier higher cash flows to return to investors throughout the cycle. You find that in the large cap dominant names, which our fund is specifically focused on.
“Our fund also has the ability to write up to 33% in a covered-call strategy, so in a sector that generally has lower dividend yields or shareholder returns, this allows us to enhance that income profile by generating additional income.”
An active fund, it also features sub-segments within the space like the pipelines and holds Kinder Morgan for less volatility in the cash flow metrics. On the flipside, it is underweight the services sector on the premise that global producers have shifted their mantra from pouring money back into the ground to pouring excess cash flow back into shareholders’ pockets. It’s meant the equipment providers and drillers have suffered.
But is this a good time to be in oil? Dragosits conceded it’s not performed well in terms of oil price but that valuations are extremely attractive.
He said: “If you look at the market weight of the S&P 500, the market weight of energy companies are at extreme lows. You’d have to go back to 1999-2000 to get the same sort of weighting of energy companies in the broad market and back then you had the tech run and oil prices were down around $20-30.
“Certainly the energy sector is representing good value and, harking back to the bias in our fund, just being in the dominant names with lower break evens and lower cost levels that will enable them to ride out a period of lower and range-bound oil prices.”