‘Money is starting to come back:’ Investors look to Canada as shine comes off U.S. shale oil

CALGARY – Generalist investors have shunned the Canadian oil and gas sector for five long years, but experts say that could change because of a slowdown in the United States shale sector.

Investors in recent months have become increasingly concerned that wells drilled in the top U.S. shale oil and gas formations have been less productive than advertised and that companies are spending too much capital on drilling programs. As a result, less capital is becoming available to U.S. exploration and production companies.

The situation is somewhat reminiscent of the Canadian oilpatch, where large and small producers in recent years have been forced to slash spending, cut jobs, scale back drilling plans and prove to investors that they can be profitable even when oil prices are low and new export pipelines are delayed.

They feel like Canada is a better place to be because they do feel like the heyday of shale is over

Analyst Phil Skolnick

But some fund managers and investment managers now believe that Canadian oil and gas companies are better suited than their U.S. competitors to attract investor funds next year.

“Money is starting to come back,” Matco Investments Ltd. vice-chairman Michael Tims said, cautioning it has not yet led to massive quantities of new money flowing into Canada. “It’s not a flood.”

Tims said he’s “cautiously optimistic” about the outlook for Canadian oil and gas stocks over the course of next year because the top companies in the sector have been able to return money to shareholders in a difficult environment.

“The relative standing of Canada, which has been low in recent years, has been rising,” he said.

If generalist investors and long-only funds, such as mutual funds, return in larger numbers to the Canadian oilpatch, it would represent a dramatic change in fortunes, especially after Encana Corp. decamped from Calgary to Denver in 2019.

Bloomberg News on Monday reported that U.S. oil and gas companies raised 70 per cent less in funds from share sales in 2019 compared with the year before. Over the course of 2019, they raised just US$1.3 billion in equity issues, which is the lowest level since 2006, before the shale oil boom, and a dramatic collapse from more than US$30 billion in 2016.

It’s really the first year since the birth of shale oil where U.S. supply growth is less than global demand growth and in my mind that’s really significant

Eric Nuttall

“The generalists that I’ve spoke to have said they want to be back in oil, but they feel like Canada is a better place to be because they do feel like the heyday of shale is over,” said Phil Skolnick, a New York-based analyst at Eight Capital who covers the Canadian oil and gas industry.

Part of the lure of Canadian stocks, he said, is that investors are looking for deep value and many Calgary-based companies are trading close to all-time lows. In addition, oilsands companies have been able to demonstrate that their production does not sharply decline over time, whereas shale oil plays face steep declines each year.

Still, all three active export pipeline proposals in Canada have faced multiple-year delays and investors remain concerned about the potential for future delays.

“There’s so much skepticism on the pipelines that it’s already priced into the stocks,” Skolnick said. “What’s not priced into the stocks is the low-decline asset base, the better returns, the better free cash flows, the sustainability in Canadian oilsands versus U.S. shale.”

Skolnick and his colleagues at Eight Capital published a research report on Dec. 19 that predicted energy and base metals companies were set up for “the reflation trade” in 2020, meaning companies in those two industries were poised for a rebound as fears about global recessions ease.

The return of generalist investors could also be vindication for energy specialists, some of whom have been patiently waiting for a bounce and for funds to notice the value in low-decline oil and gas production from formations such as the oilsands.

“The uber-high decline rates will finally demonstrate the weakness of (the shale) business model,” said Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners LP in Toronto.

Nuttall has been bullish on the Canadian oil and gas sector for a few years, noting that companies have sharply cut costs and focused on generating more free cash flow, which measures how much of a company’s money can be paid to investors.

The Canadian oil and gas industry has experienced multiple setbacks, but he said that next year is expected to mark a slowdown in shale oil growth in the U.S.

“It’s really the first year since the birth of shale oil where U.S. supply growth is less than global demand growth and in my mind that’s really significant,” Nuttall said.

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