How oil and gas sector became a 'quiet little killer'

Year in review: despite a year of tumult for fossil fuels, one portfolio manager remains constructive on the sector, predicting supply shock and resilient demand

How oil and gas sector became a 'quiet little killer'

After a gut-wrenching year for oil and gas in which demand temporarily cratered, global oil prices slipped into the negative and investor preferences shifted away from fossil fuels, Rafi Tahmazian, director and senior portfolio manager at Canoe Financial, remains constructive on the oil and gas sector.

Tahmazian says that underneath the headlines, the sector has become a “quiet little killer.” He’s already made a short-term play in natural gas, which has seen its price shoot up as oil prices declined and exploration ceased this year. He says oil demand over the whole year has been remarkably resilient even as huge sectors of the global economy have shut down, meaning the commodity isn’t going anywhere.  He also sees a supply shock in future, which will catapult oil prices and make a fortune for investors who’ve kept their capital in North American producers.

“People might point to the COVID shutdown and oil price correction as a lesson, but that’s not a lesson, that’s a shock,” Tahmazian says. “What we learned is that demand bounced back with resilience. Even when we stopped driving and flying, the world was still consuming 75 million barrels a day. We also saw a rapid collapse in US production as a truly high-cost operation, and we’re not likely to see that production come back soon. We also saw that a focus on oil was hindering natural gas – the collapse in oil production has strengthened the price of gas and left Canada in a good position as a result.”

Tahmazian says it’s flawed thinking to look at the price collapse in spring as an indication of the sector’s long-term health. He says the bounceback in demand, the ongoing necessity of fossil fuels in the developing world and government support for struggling high-consuming industries like airlines have far more impact on the sector’s outlook than a one-off shock. And, he adds, while he’s constructive on renewable energy storage innovations, as of now, renewables can’t replace oil and gas.

The spring shock did, however, “cut US production off at the knees,” Tahmazian says, setting up a world where OPEC is back in control of oil prices. At the same time, he sees a looming supply shock as capital leaves the oil and gas industries. Maintaining production at 100 million barrels a day is extremely expensive, especially when high-cost shale production was key to that supply. Now, with that production in crisis as shale oil producers either declare bankruptcy or enter mergers and demand growing as the effects of the pandemic eventually subside, Tahmazian expects demand to far outpace supply.

In the short term, Tahmazian’s focus remains on natural gas. For the first time in years, he predicts that the winter will materially impact the price of natural gas. In addition, he points out that five companies now represent more than 65% of Canadian gas production, creating an investable oligopoly. At the same time, he sees gas as a mid-cycle trade that investors and advisors should be aware of; he mentions Tourmaline and Canadian Natural as solid investments for a natural gas play.

This year has also seen the rise of ESG investing as a mainstream priority for Canadian investors; public perception often assumes that an ESG mandate must exclude sectors like oil and gas. However, Tahmazian says oil and gas companies can fit in an ESG portfolio, noting that ESG is becoming defined as work toward actionable goals on environmental, social and governance fronts. Oil companies, he says, are more than capable of improving gender diversity on their boards, taking more steps towards social responsibility and even improving their environmental records.

In the year ahead, Tahmazian says advisors should consider the potential booms in the oil sector’s future, noting that the potential for profit alone, on the back of huge capital shifts away from oil and a looming supply shock, demand serious consideration.

He also suggests that any conversation around ethics should take into account the human rights abuses rampant in oil-producing economies around the world. Advisors need to be asking their clients if, in a world where oil consumption is still set to accelerate, they want their capital tied to a more ethical set of producers.