After Exxon announced it may be forced to write down the value of its Canadian oil and gas assets, we sat down with Wayne Wachell, CEO of investment management firm Genus Capital, to discuss what’s on the horizon for Canadian energy investments.
“With the divestment movement and more government policies pertaining to climate change, oil producers are going to start having stranded assets (oil kept in the ground),” Wachell says. “In fact, analysts project that half of the fossil fuel reserves in the world will be stranded. That means the high cost oil, like in the oil sands, will get hit by prices being driven down. I believe that OPEC’s recent behaviour is being driven by the concern of stranded assets.”
Although some investors are reluctant to accept stranded assets risk as a reality, Wachell believes that Exxon’s decision to write down higher cost reserves sends out a strong message.
Wachell also believes that Trump’s aim of encouraging deregulation and increasing production of hydrocarbons in the U.S. could exacerbate Canada’s oil problems. “His goal is to make the US completely energy independent, so that means OPEC will have more supply to sell to the rest of the world, which will further threaten our higher cost oil in the oil sands,” he says. “There will be plusses from Trump’s policies, though, in terms of opening up the pipelines. But, in the longer-term, I think it will lower the price of oil and that’s going to put pressure on our oil sands.”
Wachell sees many investors divesting away from fossil fuels for two main reasons: the impact of their investments on climate change, and a realization around the longer-term risk associated with hydrocarbons. “Investors are starting to divest and it’s going to put further pressure on oil stocks,” Wachell says. “Stocks will go up and down depending on the cycle, but I think we’ll see capital moving away from high cost energy like offshore or arctic. Canadians are going to have to diversify their energy investments longer-term.”
In response to changing investor demands, Genus has created a public market impact fund which has 50% of its portfolio invested in clean tech and renewable energy firms, including Innergex Renewable Energy in Canada. “Those investments are performing well,” Wachell says. “Over the past two years, that fund has been benchmark-like against the MSCI World Index. It’s held up well in a period where oil came back well.”
Wachell is attracted to high profile green companies Solar City and Tesla but doesn’t think now is the right time to invest in those particular firms. “We think that Tesla is a great company longer-term but they don’t have their production cycle and process worked out,” he says. “It’s a disruptive company and we want to focus on companies like that, but you have to wait until the fundamentals come around. Buying a basket of these types of stocks and holding them passively doesn’t make any sense, you have to wait for the fundamentals. But I do think they will really do well once their business models are calibrated.”
As more Canadians seek investments that are aligned with their personal values, Wachell believes conscientious advisors should be keeping a close eye on the renewable energy and clean tech spaces. “It’s a way for advisors to differentiate their whole business,” he says. “It’s a growth area and we believe that you don’t need hydrocarbons to get performance. In removing hydrocarbons from a portfolio, you don’t have to give up any return or add risk.”
Continuing pain foreseen for emerging markets
October mutual fund statistics announced