The world is awash in oil and gas. Lower energy costs are a big plus for the inflation fight allowing for additional rate cuts. That can provide a boost for the global economy and for stock and bond markets on the whole. But those lower oil and gas prices will suppress the the earnings and free cash flow for our oil and gas stocks. That’s exactly what we saw this past week as Imperial oil and Canadian Natural Resources reported earnings. These stocks are still free cash flow gushers and they delivered very strong numbers, all considered. They are very well managed producers. We’ll take a look at earnings and the loonie slips, on the Sunday Reads.
Before we dig into the Canadian oil stocks’ earnings let’s make sure you are not caught off guard by the falling Loonie. From early 2019 …
Don’t let the Canadian Dollar stop you at the border.
Thanks to investments we can hedge most every event. When it comes to massive asteroids hitting the planet or the Toronto Maple Leafs winning the Stanley Cup, we can’t help you there. Ironically, both of these unprobable events carry the same odds.
If you had bought the U.S. market (IVV) in early 2019, you would have turned every $1 dollar invested into $2.50. The returns are even greater in Canadian Dollars.
An investor with a well-balanced portfolio (including ample U.S. stocks or ETFs) will not stress over a weak Canadian Dollar, or on the flipside, any price spike at the pumps. Our oil stocks thrive on higher oil prices.
The bond market says not so fast, Mr. Powell
Bond yields have been increasing since the Fed in the U.S. introduced a 50 bps rate cut. That recent peak for the bond market (102) on the right hand side of the chart below aligns with the rate cut on September 18th. Remember bond prices go down as yields go up.
Here’s what Jim Grant has to say. It’s the massive (runaway) U.S. debt and deficits.
Once again we can hedge any event, even the worry (or reality) of runaway U.S. debts and deficits. Gold gold and bitcoin and real assets?
- AGG = U.S. bond market
- GLD = Gold price
- BTCTR = Bitcoin price
That’s why we might consider a New Balanced Portfolio. I’ve updated that New Balanced Portfolio post to show the drastic outperformance over the traditional stock and bond balanced portfolio. You’ll find the asset class returns that have offered that boost.
Mega growth from mega tech?
Framing the 3rd quarter revenue growth from one year ago …
Yes, it’s where they keep the growth – U.S.A.
Many of the Magnificent 7 and other growth stocks have reported earnings. The results have mostly been very strong, but the markets have slipped the past two weeks. The markets have voted, and they are not too thrilled about the election in the U.S. this coming Tuesday. There’s a chance that someone could win goes ‘the joke’.
Just keep in mind that even as extreme as things feel these days, when it comes to who is in power it doesn’t really matter …
I am updating the post on our U.S. stock portfolio. Here’s the key chart …
Oil profits slip
I put Canadian oil and gas stocks on the table for readers back in October of 2020, or about 500% ago 🙂
They were advertised as free cash flow gushers, and that story has played out, but has it run its course? Lower oil prices are holding back earnings growth.
Imperial oil reported third quarter results this past week with earnings down 20% from a year ago. Imperial is producing more oil, but obtaining lower prices.
Here’s the third quarter highlights from the Imperial Oil site …
Also from the report …
Industry refining margins declined versus the second quarter as increased supply outpaced global demand.
Net, net, or translation – the world is awash in oil. And gas is more than abundent as well. That’s good for the inflation fight. That’s good for the consumer, and a possible tailwind for global economies. But it certainly holds back our cash flow gushers. We need a certain price. Experts seem to suggest at least $50 for Western Canadian Select and $70 for WTI. Check out prices and commentary at oilprice.com.
Check out Canada’s top robo advisor
All said, we can see that Imperial Oil is doing exactly what we want, returning free cash flow to shareholders by the way of dividends and share buy backs (known as the shareholder yield). In the third quarter alone that tally was $322 million in dividends and $1.2 billion in share repurchases. That is impressive.
The Canadian starting line – the Big 4
I have long suggested an overweight to what I call the Big 4 in Canada – CNQ, IMO, SU and TOU (for natural gas). U.S. investors can certainly own this 4-pack on U.S. exchanges.
With a more integrated (diversified) model, the group has beat the Canadian index (XEG) and the U.S. energy index (XLE). The beat comes with much less volatility as well.
I continue to chip away at the Big 4. But keep in mind the sector comes with incredible volatility and long periods of underperformance is the norm. But oil and gas stocks can provide a wonderful inflation hedge. And I like the free cash flow ‘story’. I recognize that we are largely investing in the ability of the Saudis and OPEC+ to control oil prices. Oil has always been a manipulated commodity on the global pricing stage.
Keep your oil and gas weighting at a level that matches your risk tolerance. It’s just one part of the portfolio, and again, the bulk of your portfolio might enjoy those lower oil prices.
You can check out CNQ earnings as well. It’s the same modest reduction of profits and cash flow due to lower oil and gas prices.
Canadian Natural said on Thursday that its adjusted net earnings from operations for the third quarter stood at US$1.5 billion (C$2.1 billion), down compared with US$2 billion (C$2.85 billion) for the third quarter of 2023.
On Twitter, Burnsco shared the RBC take on another flawless quarter …
National Bank says, ya ‘us too’ …
It’s ‘all good’ even in the low $40’s (oil price) says CNQ management.
Take tolls on oil and gas too
We can make money coming and going. That’s by way of pipelines of course, known as a defensive sub sector that does not rely as much on oil and gas prices. The pipes can provide a nice hedge if the energy sector is healthy enough on the demand side. And certainly oil and gas demand is increasing at a more than decent rate. Prospects for natural gas might trump that of oil (note this is not a political pun).
I have penned a bunch on the pipelines over the years, here’s one of the latest with – What to do with the TC Energy spin off.
Both TC Energy and South Bow are performing very well from the time of spin off. TC Energy, Enbridge and Pembina are delivering nicely for our portfolios.
Buffett’s cash pile is bigger than his stock pile
Berkshire Hathaway reported earnings. And that report showed the ongoing sale of Apple and other stocks as the cash flow gets ready to burst at the seams, now topping $325 billion. That’s a sum bigger than the public stock portfolio. Keep in mind that Berkshire has many other divisions not in the public portfolio – insurance, energy, railways and more.
Cash is a drag on portfolio performance, but I don’t mind $325 billion in good hands. It’s a wonderful recession hedge. The world’s greatest investor would go hunting for incredible bargains to build generational wealth. BRK.B is the largest holding in my wife’s RRSP by a considerable margin. I’ve long suggested the stock as a must for retirees and near retirees. We keep adding.
More Sunday Reads
So many companies reported in the Dividend Hawk portfolio, find the deets here. It was a busy week for dividends received as well.
Banker on Wheels wonders how long can this exceptional U.S. stock outperformance last?
Stocktrades digs into subprime lender Goeasy. Another recent post looks at the troubles and growth anchors for TD Bank.
At Findependence Hub, Jonathan Chevreau looks at a new retirement product from Sun Life. I would be sceptical of any investment product from an insurance company.
Also on the retirement front Fritz at the Retirement Manifesto looks back on what he’s learned after writing over 400 articles on retirement.
At Tawcan, Bob offers up more on his 2024 goals and resolutions.
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SU has done nicely for me.
I picked up a block of CNQ shares this past week.
I also hold Peyto (PEYUF).
Thanks as always for your suggestions, Dale!
My pleasure, follow Burnsco and others on Twitter for more favourites and reports.
Thanks for following and commenting 🙂
Dale
Hello Dale,
Thanks for the reference to the Canadian Dollar Value Relative to the US Dollar.
Would you consider it to be a relatively low risk to purchase largely US based ETF’s that are held in Canadian Dollars (like VFV, IVV, or even XAW) at the current low levels of the Canadian Dollar?
What if the Canadian Dollar rises to levels seen in the 2010 to 2015 period for an extended period of time? Would that not result in a considerable drag on returns for such ETF’s? Prospect of that happening may be low, but wanted to bring it up as it may be a possibility.
Hi Angelo, for sure it cuts boths ways. But if the U.S. Dollar weakens our Canadian Dollar assets will get a boost relative to the U.S. Dollar. And it will also depend on the asset performance of course. So if Canadian stock ETF goes up 10% and the U.S. Dollar weakens 10% we have a 20% U.S. dollar return. The nature of a hedge, there’s a plus side with a balanced portfolio holding various currencies.
And if you hold U.S. assets to cover U.S. expenses there is no risk to the downside. A U.S. dollar is worth a U.S. dollar.
One might certainly manage the U.S. dollar risk if they are heavily weighted to the U.S. but mostly spend in Canadian Dollars aka in retirement. It would make sense to hold hedged and unhedged positions to protect against U.S. Dollar decline.
Most would suggest that we don’t hedge when we’re in the accumulation stage with a decade or more to go to the retirement start date. It all comes out in the wash over time.
That’s my first pass at this, I will also give it more thought for any special situations.
Hello Dale,
Thanks for the response!!
I’m confident that Canadian oil stocks will continue to be a good long-term investment, especially for investors who are aware of the associated risks.