May 24, 2019

Winnipeg
10° C, Overcast

Full Forecast

Advertisement

Advertise With Us

Opinion

Oil's well that ends well?

Bargains may be found as energy sector nears bottom, analyst says

Hey there, time traveller!
This article was published 20/8/2016 (1007 days ago), so information in it may no longer be current.

It used to be a Canadian investor’s portfolio wasn’t complete without significant exposure to the energy industry. That has changed in the span of two years.

Now many investors are dumping these investments or, at least, considering doing so — particularly those involved in oil, as the price for the commodity hit lows that, before late 2014, were almost unforeseeable.

Yet, one fund manager following the industry says oil is likely reaching its bottom, and astute investors may find bargains in the midst of the carnage.

“We’re finding most of the value right now for the large integrated companies,” says Doug Edman, director of investments and a member of the basic materials research team, covering the oil and gas industry, with Brandes Investment Partners.

Get the full story.
No credit card required. Cancel anytime.

Join free for 30 days

After that, pay as little as $0.99 per month for the best local news coverage in Manitoba.

 

Already a subscriber?

Log in

Join free for 30 days

 

Already a subscriber?

Log in

Subscribers Log in below to continue reading,
not a subscriber? Create an account to start a 30 day free trial.

Log in Create your account

Your free trial has come to an end.

We hope you have enjoyed your trial! To continue reading, we recommend our Read Now Pay Later membership. Simply add a form of payment and pay only 27¢ per article.

For unlimited access to the best local, national, and international news and much more, try an All Access Digital subscription:

Thank you for supporting the journalism that our community needs!

Your free trial has come to an end.

We hope you have enjoyed your trial! To continue reading, we recommend our Read Now Pay Later membership. Simply add a form of payment and pay only 27¢ per article.

For unlimited access to the best local, national, and international news and much more, try an All Access Digital subscription:

Thank you for supporting the journalism that our community needs!

We hope you have enjoyed your free trial!

To continue reading, select a plan below:

All Access Digital

Introductory pricing*

99¢

per month

  • Unlimited online reading and commenting
  • Daily newspaper replica e-Edition
  • News Break - our award-winning iOS app
  • Exclusive perks & discounts
Continue

Read Now Pay Later

Pay

27¢

per article

  • Commitment-free
  • Cancel anytime
  • Only pay for what you read
  • Refunds available
Continue

*Introductory pricing schedule for 12 month: $0.99/month plus tax for first 3 months, $5.99/month for months 4 - 6, $10.99/month for months 7 - 9, $13.99/month for months 10 - 12. Standard All Access Digital rate of $16.99/month begins after first year.

We hope you have enjoyed your free trial!

To continue reading, select a plan below:

Read Now Pay Later

Pay

27¢

per article

  • Commitment-free
  • Cancel anytime
  • Only pay for what you read
  • Refunds available
Continue

All Access Digital

Introductory pricing*

99¢

per month

  • Unlimited online reading and commenting
  • Daily newspaper replica e-Edition
  • News Break - our award-winning iOS app
  • Exclusive perks & discounts
Continue

Mon to Sat Delivery

Pay

$34.36

per month

  • Includes all benefits of All Access Digital
  • 6-day delivery of our award-winning newspaper
Continue

*Introductory pricing schedule for 12 month: $0.99/month plus tax for first 3 months, $5.99/month for months 4 - 6, $10.99/month for months 7 - 9, $13.99/month for months 10 - 12. Standard All Access Digital rate of $16.99/month begins after first year.

We hope you have enjoyed your free trial!

To continue reading, select a plan below:

All Access Digital

Introductory pricing*

99¢

per month

  • Unlimited online reading and commenting
  • Daily newspaper replica e-Edition
  • News Break - our award-winning iOS app
  • Exclusive perks & discounts
Continue

Read Now Pay Later

Pay

27¢

per article

  • Commitment-free
  • Cancel anytime
  • Only pay for what you read
  • Refunds available
Continue

*Introductory pricing schedule for 12 month: $0.99/month plus tax for first 3 months, $5.99/month for months 4 - 6, $10.99/month for months 7 - 9, $13.99/month for months 10 - 12. Standard All Access Digital rate of $16.99/month begins after first year.

We hope you have enjoyed your free trial!

To continue reading, select a plan below:

Read Now Pay Later

Pay

27¢

per article

  • Commitment-free
  • Cancel anytime
  • Only pay for what you read
  • Refunds available
Continue

All Access Digital

Introductory pricing*

99¢

per month

  • Unlimited online reading and commenting
  • Daily newspaper replica e-Edition
  • News Break - our award-winning iOS app
  • Exclusive perks & discounts
Continue

*Introductory pricing schedule for 12 month: $0.99/month plus tax for first 3 months, $5.99/month for months 4 - 6, $10.99/month for months 7 - 9, $13.99/month for months 10 - 12. Standard All Access Digital rate of $16.99/month begins after first year.

Hey there, time traveller!
This article was published 20/8/2016 (1007 days ago), so information in it may no longer be current.

It used to be a Canadian investor’s portfolio wasn’t complete without significant exposure to the energy industry. That has changed in the span of two years.

Now many investors are dumping these investments or, at least, considering doing so — particularly those involved in oil, as the price for the commodity hit lows that, before late 2014, were almost unforeseeable.

tribune media</p></p>

tribune media

Yet, one fund manager following the industry says oil is likely reaching its bottom, and astute investors may find bargains in the midst of the carnage.

"We’re finding most of the value right now for the large integrated companies," says Doug Edman, director of investments and a member of the basic materials research team, covering the oil and gas industry, with Brandes Investment Partners.

The Atlanta-based analyst is referring to large oil firms that extract, refine and sell products such as gasoline and diesel. These include giants such as Suncor Energy, Exxon Mobil Corp., BP Plc. and Chevron Corp.

"Over the last couple of years, because oil prices went down, the market fairly indiscriminately hit the stocks of everything in the oil business, whether it was upstream, downstream, integrated, oilfield services or drillers," Edman says.

While upstream firms — those that explore and extract the commodity — have suffered in North America, with many smaller firms going bankrupt, the bigger integrated oil companies with more diverse streams of revenue, such as selling gasoline, have managed to weather the storm.

And when oil rebounds, they’re poised to do well, Edman says.

Of course, when that will occur is a multibillion-dollar question.

Edman says it’s unlikely consistent US$100-plus-a-barrel oil will be seen any time soon — or ever again for that matter. But that doesn’t mean investors should not have exposure to the sector. Profits are still to be found, he says.

The reason: demand is still growing, even faster than its historical pace.

"If you draw a line for the last 40 years, you’ve seen global consumption of oil ramping up about a million barrels a day each year," he says.

That hasn’t changed. "In fact, last year, there was pretty stellar growth at 1.8 million barrels a day."

For this year, the Energy Information Administration in the United States predicts global demand will grow by more than 1.4 million barrels a day.

The growth alone should be reason enough to believe prices will rise with demand — eventually. But the problem, so far, has been North America’s industry — largely involved in unconventional oil production involving horizontal drilling and hydraulic fracturing (fracking) — had been ramping up production as much as possible while prices were above US$100 for a barrel of West Texas Intermediate oil.

"Most oil companies, as well as oilfield services and drillers, were expanding capacity and really trying to grow. And it made sense (up until the fall of 2014)," he says.

Yet, as supply from North American sources grew, the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, opted not to limit production to maintain higher prices. The decision was, and is, largely driven by OPEC members not wanting to lose market share to North American competitors. And because many U.S. and Canadian producers require high prices to be profitable, cheap oil affects them much more negatively than most OPEC producers, which generally have larger conventional reserves that are less costly to produce.

The strategy has worked. North American producers have cut back on spending on new projects while exploration and drilling have largely stopped. Dozens of firms have gone bankrupt, including many junior companies in Canada.

After consecutive years of growth in North America, production is expected to be down this year, Edman says. And it will continue to slow as long as prices remain below US$50 a barrel.

The lack of new production undoubtedly will stymie supply growth, not just because no new oil is being added to the market. Existing production will also decline among unconventional producing assets because of the nature of those deposits.

"On these unconventional wells, what happens is you see peak production occurring on these assets almost right from Day 1, and they have a very steep decline curve," Edman says.

To maintain production in North American, new drilling is required. And that’s not happening — at least at sustainable levels.

Recent reports indicate increases in rig counts, but that’s largely a response to a decrease in production caused by the Fort McMurray, Alta., wildfire, which shut down activity across the areas for weeks.

Edman sees a brighter future simply because supply is coming down quickly while demand continues to increase. "Based on current oil prices, through the long term, there will not be enough oil produced to meet global demand. So you’re going to need to see higher prices and, along with those, you’re going to see higher returns being generated by these companies."

However, new environmental regulation to fight climate change and advances in green technology will likely limit how high the price of oil will go, he says. In other words, he doesn’t foresee a return to the 2008 peak of US$147-plus per barrel. He says even US$100-barrel oil is unlikely, and if it does go that high, OPEC will likely intervene to defend its market share.

The sweet spot, he says, is likely between US$50 and US$80 a barrel.

While Edman says he cannot predict with certainty when oil will rebound, he does argue it could be sooner than some think because of basic supply-and-demand economics. Supply will continue to contract below US$50 a barrel, while demand will steadily grow and, at some point, demand will surpass supply.

"In other words, we need greater-than-$50-a-barrel oil price, in my opinion, to be able to meet future demand," he says. "I don’t believe we have to wait five years (for that to happen). It will likely happen in the next year or so."

joelschles@gmail.com

Advertisement

Advertise With Us

You can comment on most stories on The Winnipeg Free Press website. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or digital subscriber to join the conversation and give your feedback.

Have Your Say

Have Your Say

Comments are open to The Winnipeg Free Press print or digital subscribers only. why?

Have Your Say

Comments are open to The Winnipeg Free Press Subscribers only. why?

By submitting your comment, you agree to abide by our Community Standards and Moderation Policy. These guidelines were revised effective February 27, 2019. Have a question about our comment forum? Check our frequently asked questions.

Advertisement

Advertise With Us