The Canadian energy sector has been beaten up. Foreign investors have given up and so have many Canadian investors. Where there is incredible pessimism there can be incredible rewards. But there is certainly no guarantee that the pessimism for the Canadian energy patch is not deserved. That said, it is also certainly possible that the pessimism has jumped the shark. There may be incredible value in the energy sector for Canadian investors.
Off the top I am guilty of previously piling on with the pessimism. For Million Dollar Journey I had penned on Canadian energy stocks and their dividends.
The Canadian energy sector ETFs fell by some 70% in the stock market correction of March and into April. We have seen some slight recovery as the North American and Global economic recovery takes shape.
The need for oil and gas is not going away.
While I am certainly a fan of the global move to green energy solutions, the shift will take some time. Perhaps it will take decades. And even during a robust transition to renewable energy, oil and gas will continue to play a leading role. We need natural gas to heat our homes and power our economy. And while the shift to electric vehicles attracts all of the headlines and much of the attention of investors, traditional gas powered vehicle sales will continue to dominate. We will need oil for various forms of transportation.
From the IEA …
Sales of electric cars topped 2.1 million globally in 2019, surpassing 2018 – already a record year – to boost the stock to 7.2 million electric cars. Electric cars, which accounted for 2.6% of global car sales and about 1% of global car stock in 2019, registered a 40% year-on-year increase.
It’s certainly a promising trend.
From that IEA report …
The Sustainable Development Scenario incorporates the targets of the EV30@30 Campaign to collectively reach a 30% market share for electric vehicles in all modes except two-wheelers by 2030.
And all of the above takes place as overall demand for vehicles increases. The need for oil will remain with us for quite some time under most projections. Oil demand will be driven by airlines and other industrial use as well.
We’ll need to move that oil and gas.
Let’s start with the pipelines that move the oil and gas around North America. The two leaders are Enbridge and TP Energy (formerly TransCanada Pipelines). These two stocks are starting to get the attention of analysts and writers. Full disclosure – I own these two companies in my concentrated Canadian wide moat portfolio.
The are paying incredibly attractive dividends that are expected to remain on the path of impressive dividend growth. This Globe and Mail article from John Heinzl offered that slumping pipelines offer an opportunity.
From that article …
Enbridge and TC Energy yield about 8.4 per cent and 5.7 per cent, respectively. The yields are even more appealing given that both companies plan to continue raising their dividends as they deploy billions of dollars into capital projects over the next several years.
Enbridge, which hiked its dividend by 9.8 per cent last December, has said it expects to raise its payout by 5 per cent to 7 per cent annually, in line with its expected growth in distributable cash flow. TC Energy, which raised its dividend by 8 per cent in February, expects to boost its dividend by 8 to 10 per cent in 2021 and 5 per cent to 7 per cent thereafter.
The companies are both largely and mostly earning buy estimates from analysts.
Stocktrades.ca mentions the pipes in their look at top Canadian energy picks.
Dividend athlete also has a look at Enbridge.
In my weekly column for MoneySense, I linked to this Morningstar article from Ruth Saldhana that looked at the top 10 moat-y Canadian stocks that offered great value. You’ll find Enbridge on that list. Enbridge also makes Morningstar’s exclusive list of Canadian wide moat stocks. There are only 5 Canadian stocks that make the wide moat list.
Free cash flow for miles.
In that Stocktrades post, the top energy pick is Tourmaline, mostly a natural gas producer. That is also a top pick of Eric Nuttall who runs the (long suffering) Ninepoint energy fund. Eric says enough is enough in a recent BNN Bloomberg interview. Many of the Canadian energy producers are just too cheap to ignore.
In this video link Eric discusses Tamarack Valley Energy.
Eric sees a 259% upside. He also states that at current oil prices and the ridiculous free cash flow yield they could ‘buy themselves back’ and privatize within three to four years. It is a similar story for many of the companies that Eric discusses in that interview. You’ll find the separate stock stories in individual videos on that Bloomberg page.
Here’s the top 10 holdings for the Ninepoint energy fund (October 2020).
Of course you could buy the fund, or do your own research on the individual holdings. And certainly this is not investment advice. But I’ll admit to being more than intrigued. As dividends build in a few of my accounts I may nibble on a name or three. I will keep you posted. And we’ll keep an eye on the energy sector for Canadian investors.
Canadian oil and gas stock returns update
From the time of the post, October 2020, the TSX capped energy index (XEG) is up 148% (to the end of November 2021). Here are a few shorter term metrics for the index ETF.
The Ninepoint energy fund is up almost 400%.
XEG holds mostly larger cap stocks, while the Ninepoint fund seeks the greater free cashflow that is available in the mid cap names.
While I was a few months late to eat my own cooking, we have positions in XEG and in the Ninepoint fund. It is available in ETF form by way of the ticker NNRG.
I am with Eric Nuttall in that I see traditional energy having a very good run for the next several years. But of course there are great risks and this is a very volatile sector.
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