Ninepoint Partners' Eric Nuttall speaks out on how skewed ESG view is blinding investors to coming multi-year bull market for oil
After what seems like years of pain, the oil sector finally has a shot at regaining its former glory.
As vaccinations continue and a resurgence in demand for travel helps lift prices from their 2020 doldrums, Canadian oil producers are feeling a sense of collective optimism not seen in years. Encouraged by a strong quarterly advance in both oil price and energy sector indices, investors are also increasingly convinced of the commodity’s worth in an inflationary environment.
Still, that sense of confidence isn’t unbridled by any means. With the increasing recognition of climate change due to extreme weather events, governments are stepping up their efforts to encourage a green transition, and investors are increasingly holding oil companies to account for their role in the unfolding global crisis.
But while the ESG movement might hold people back from betting on the industry’s future, Eric Nuttall, who has been specializing in the energy sector for nearly two decades, is unabashedly bullish.
“My expectation is that in a post-COVID world, the demand for oil will continue to grow for at least the next decade,” the partner and senior portfolio manager at Ninepoint Partners told Wealth Professional. “At the same time, the curtailments to the ability to grow supply are what I think are entering us into a supply crisis.”
The end of U.S. shale disruption
Most notable among those curtailments, Nuttall said, is the structural change that’s taken root among U.S. shale companies. While the past 10 years has seen all non-OPEC oil production being fulfilled by a boom in the sector, subsequent poor performance across the energy industry has forced many players to change business models: instead of pursuing growth at all costs, they are now focusing more on returning capital to shareholders through dividends and buybacks.
“The era of hyper-growth in U.S. shale is over. There's a lot less capital going into the ground,” he said. “Going forward, we think U.S. shale growth can only satisfy half of global demand growth. I’m not sure people understand how profound the implications of that are.”
The U.S. shale industry, Nuttall explained, was disruptive because of how quickly it was able to bring oil to the global market; compared to the four- to seven-year timeframe expected from offshore drilling and oilsands projects, shale producers are able to roll out barrels in as little as six months.
With U.S. shale production hobbled, the world is back to relying on more long-cycle producers. However, he said the global super majors have gone through a seven-year period of underinvestment, which is expected to extend in the face of accelerating ESG sentiment.
“Companies all around the world are under enormous pressure to reach net-zero targets, with most aiming for 2050. To achieve that, they're either divesting from conventional production, or just not investing,” he said. “There's a few large examples of that, notably BP and Royal Dutch Shell, both of which are allowing conventional oil production to fall to free up cash to invest in renewable projects.”
Members of the OPEC group of nations, meanwhile, have been unable to invest in new capacity amid a multi-year struggle with too-low prices. In 2021, they’ve focused on repairing the damage from 2020, which Nuttall said they’ve succeeded at; global inventories are now at a deficit not just relative to last year, but to the trailing four-year average excluding 2020. But even as OPEC steps back from curtailing supply, he forecasts that they’ll max out their spare production capacity by next year.
“That outlook spells not just an energy supply crisis, but a multi-year bull market for oil,” Nuttall said. “As companies prioritize return of capital through dividends and buybacks, it should shake investors from their collective apathy against energy stocks.”
An ESG reality check?
Rather than being apathetic, many ESG investors would see themselves as devotees to the vision of a world freed from its dependence on oil as an energy source. But Nuttall believes that’s wishful thinking: by the time the 2050 deadline for net-zero commitments comes, he said the global population is projected to grow by at least 1.4 billion people. Most of that is expected in emerging countries with a greater demand for reliable and affordable energy, which has traditionally come from hydrocarbons rather than solar or wind.
“I’m confident that the demand for energy is going to grow for at least the next 10 years,” Nuttall said. “This perception that oil is a sunset industry, and that in a few years we won't be consuming oil for energy, plastics, rubber, transportation … that level of ignorance is perverting people's perception of the long-term value of energy companies.”
Advocates of sustainability are resting their hopes on advances in renewables to change the planet’s fate. But as Nuttall sees it, cleantech companies offer non-differentiated products, with many ventures being completely reliant on government subsidies. That may very well make them horrific long-term investments; as a case in point, he noted how Siemens cut its full-year EBITDA expectations to between 0% and -1% last week.
“Like numerous other sectors and asset classes, cleantech companies were a massive winner for much of last year,” he said. “But when these businesses start reporting negative margins, reality has to sink in for a lot of their investors.”
As for the idea that Canadian energy companies are falling short on ESG metrics, Nuttall is quick to point out that the oil and gas industry is far and away the largest investor in clean technology out of any sector in Canada. A consortium of producers representing 90% of oilsand production has joined the global wave of pledges targeting net-zero emissions by 2050, he added.
Beyond that, he said Canada has long been considered the gold standard for the global oil sector with respect to environmental protection. On the social and governance side, Canada also receives high marks among its peers on key metrics such as insider ownership and ethical labour practices. With those in mind, he believes the country is a strong contender to become the oil supplier of choice from an ESG perspective.
“The oil sector used to make up 15% of our GDP, and we have the fourth largest oil reserves of any country,” he said. “Think of another country in the world that would feel guilty and apologetic for producing that product, one that will be in demand for the rest of your and my lifetime, when they're doing it in the most ethical and clean manner of any oil-producing nation on the planet … It's as Canadian as you can possibly get.”