What's next for Canadian oil?

After a US$1bn strategic government investment in the pipelines, are Canadian energy companies better positioned for the volatility ahead?

Ruth Saldanha 6 April, 2020 | 1:39AM
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Editor's note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.

Ruth Saldanha: It's been a volatile time for oil. Global crude fell to 18-year lows and Saudi Aramco is widely expected to cut pricing further. But then Canadian oil got a boost when Alberta decided to invest US$1.1 billion in the Keystone XL pipeline, intended to increase the flow of Alberta crude and reduce backlogs of oil in the province. As a result, Canadian oil and gas stocks rallied. So, what's likely to happen next for Canadian oil and oil stocks? Nicolas Piquard, Portfolio Manager at Horizons ETFs is here today to talk about this.

Nick, thank you so much for being here today.

Nicolas Piquard: Thanks for having me.

Saldanha: First up, what do you think of all the recent developments in oil, both local and global, and what kind of impact do you think this is likely to have on Canadian crude?

Piquard: Well, obviously, the big headlines are all about the global headlines and what's happening with the coronavirus. I think when this first got started, people definitely underestimated the impact it was going to have. And now, there's a lot of uncertainty. How long is this going to last? I think determining that and I think once we get a better idea, we'll be able to have a better prediction about where oil and gas is going to go next.

Saldanha: After Alberta's announcement though, oil and gas stocks rallied. Do you think both the rally in Canadian crude and the crude stocks, do you think this is likely to be just a short-term blip or do you think it will last?

Piquard: I think it's going to be a volatile quarter. I think we may see a bit more of an upswing, but it's going to be volatile. It's going to depend on the news coming out of the coronavirus and how quickly we can deal with this epidemic. I think volatility will continue. We can be a little bit higher; we can be lower. In the long-term, however, I do think that the energy stocks offer compelling value.

Saldanha: In the short term though, there has been some amounts of pain within the Inter Pipeline just cutting dividends by 72%. Do you see more dividend cuts in the energy space in Canadian oil?

Piquard: I think that there's definitely going to be more cuts in the energy space. Right now, capital is key for these companies. They have to find ways to survive in the short term. The good news about the coronavirus is that it's hopefully going to be a short-term impact on demand. But in the longer-term picture, things will definitely improve from where we are now. So, companies, they have to focus on maintaining capital, which may mean cutting dividends in the short term, but hopefully, so that they can be stronger in the long term.

Saldanha: In the short to medium term are any Canadian energy dividends safe?

Piquard: I think that perhaps some of them are. The ones that have more hedged production or maybe some of the pipeline stocks have a better outlook. But I think they all have to be considered to be on the table, depending on how long this goes on for. If the coronavirus – if we can't deal with this for longer than end of Q2, which is what hopefully we're looking at right now, if it keeps going after that, I think everyone is going to have to look at their balance sheets and say, we have to cut some dividends.

Saldanha: Finally, how should investors play the Canadian energy space right now?

Piquard: Well, I think investors have to decide what do they think is going to be the outcome with the coronavirus in the global economy. If you think, like I do, that this is going to be something that we can get over, over the next quarter or two, then I think energy stocks offer really good long-term value here. I think the way to play it though is through a diversified approach. This way you kind of minimize the possibility that some of these companies may go bankrupt or may go lower. One of the things that I would consider is, a diversified portfolio or a sector ETF approach.

Saldanha: Thank you so much for joining us today, Nick.

Piquard: Thanks for having me.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Cenovus Energy Inc27.43 CAD0.22
Enbridge Inc50.54 CAD0.74Rating
TC Energy Corp57.16 CAD1.33Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.


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