Key Takeaways
- The COVID-19 pandemic and U.S. President Donald Trump’s actions have created buying opportunities for Canadian oil stocks.
- Experts believe that the idea of the U.S. gaining leverage over Canada by diversifying its oil supplies from Venezuela is "steeped in profound ignorance."
- The U.S. benchmark oil price is currently in the "death zone" for oil production, making it unlikely for companies to reallocate capital to Venezuela.
- Canadian oil and gas stocks have booked a relatively strong performance in recent years, despite a lacklustre year for commodity prices.
- Experts recommend "fading" headlines about Venezuelan oil and instead focusing on the fundamentals of Canadian oil stocks.
Introduction to the Canadian Oil Market
The COVID-19 pandemic has had a significant impact on the global transportation industry, but it’s not the only factor that has affected the Canadian oil market. According to Cole Smead, an Arizona-based portfolio manager, U.S. President Donald Trump’s actions have created some of the best buying opportunities for Canadian oil stocks in recent memory. Smead recently bought shares in Canadian oil stocks, despite concerns about Venezuelan barrels rivalling Canada’s crude exports to America. Eric Nuttall, a well-known Toronto-based partner and portfolio manager at Ninepoint Partners, also bought Canadian oil stocks last week, stating that the idea of America gaining leverage over Canada by diversifying its oil supplies from Venezuela is "steeped in profound ignorance."
The Venezuelan Oil Market
Venezuela holds the largest proven oil reserves in the world, but its oil industry has been plagued by nationalization policies and a lack of investment. In 2007, former president Hugo Chávez instituted nationalization policies that led to the seizure of assets from American companies. As a result, the country’s oil infrastructure is in disarray, and it would require billions of dollars in investment to produce oil at a competitive price. Nuttall believes that the appetite of U.S. oil CEOs to re-enter Venezuela is very low, and that the country’s uncompetitive financial terms and lack of rule of law make it an unattractive investment opportunity.
Expert Analysis
Nuttall and Smead spoke to Yahoo Finance Canada on Friday, as Trump held a meeting at the White House with executives from several major U.S. oil and gas companies. After the meeting, ExxonMobil CEO Darren Wood called Venezuela "uninvestable," and Trump stated that he was "inclined to keep Exxon out" of future investment plans in the South American nation. Smead believes that the U.S. administration is "dead wrong" in its assessment of the Venezuelan oil market, and that major production increases will not occur unless companies are subsidized at current oil prices. Nuttall agrees, stating that companies will not reallocate capital from the U.S. Permian basin to Venezuela, where they would be producing ultra-low-quality barrels that are technically complicated.
The Current State of the Oil Market
The U.S. benchmark oil price was virtually flat on Monday, trading at about US$59 per barrel. Nuttall believes that the oil market is in the "death zone" for oil production, where companies are in maintenance mode and not investing in new projects. Capital Economics deputy chief North America economist Stephen Brown published a report stating that higher Venezuelan output is not an immediate threat to the Canadian economy, but that producers might face lower prices and a widening discount to WTI. Deloitte Canada partner Andrew Botterill notes that Canadian oil and gas stocks have booked a relatively strong performance in recent years, despite a lacklustre year for commodity prices.
Investment Opportunities
Smead and Nuttall are both bullish on Canadian oil stocks, despite the current challenges facing the industry. Smead believes that the cash flows produced by Canadian oil companies have "shocked everyone," and that they are able to manage their budgets effectively and maintain their margins. Nuttall recently bought a mid-cap Canadian oil sands producer that has fallen nearly 20% and has net cash on its balance sheet. He believes that the company is well-positioned for growth, despite the current uncertainty in the oil market. Overall, both experts recommend "fading" headlines about Venezuelan oil and instead focusing on the fundamentals of Canadian oil stocks.