Start Replacing Oil in Portfolios

Horizons ETFs Nick Piquard thinks that in the long-term, the sector may not be able to realise as much value from these assets as once thought possible.

Ruth Saldanha 17 August, 2021 | 2:00AM
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Ruth Saldanha: Earlier this week the UN Climate Panel said that greenhouse gas levels in the atmosphere are high enough to guarantee climate disruption for decades if not centuries. UN Secretary General Antonio Guterres called it a code red for humanity and said that the report must sound a death knell for coal and fossil fuels before they destroy our planet. What does this mean for Canadian oil and gas stocks, especially as our energy sector accounts for a significant percent of both our economy and GDP? Nick Piquard, VP and Portfolio Manager at Horizons ETFs thinks that investors should start exiting fossil fuels in their portfolios and replace them with alternative assets. He's here today to tell us why. Nick, thank you so much for being here today.

Nick Piquard: Thank you for having me.

Saldanha: Well, you've said that companies that have so far been staples in almost all Canadian portfolios, names like Suncor and Enbridge are no longer worth investors time. Why is that?

Piquard: Well, I think it really depends on your timeframe and investment objectives. It just, you know, as the UN report, that just got released, makes it clear, future investments in fossil fuels will likely be discouraged and more expensive. I remember we spoke a year ago after the tremendous drop in oil prices. And at that time, it was bullish oil and energy shares, and they're up over 100% since then, and I continue to think they're inexpensive. But from a longer-term perspective, the sector may not be able to realise as much value from these assets as we thought was possible. If you look at historically, like another sector, that used to be an important sector of the Canadian economy, like the pulp and paper sector, it went through a wave of consolidations, you know, stocks that seemed cheap, stayed cheap for a long time. Now, they weren't not necessarily bad investments, but they just didn't really have that much growth. So I think there's a lot of differences between the example I just gave you, and the fossil fuel sector. Emails were lot cheaper than paper, as opposed to fossil fuels, they're the cheaper way to generate energy. But if governments are going to fight climate change, they're going to have to raise the price of fossil fuel energy generation.

Saldanha: But that's a long-term solution. In the short to medium term, many analysts believe that there is still significant upside in energy stock, because like you said, they are undervalued. But on the flip side, because of the scarcity of underlying commodities, like lithium and uranium. The stocks in these newer sectors are trading quite high. So what in your opinion should investors do right now?

Piquard: Well, look it's certainly true that lithium stocks have been doing very well, with many of them nearing their all-time highs. It's been predicated on the fact that governments are more and more aggressive to restrict internal combustion engines, in the future. Right now, EVs only represent 5% of car sales. But some analysts predict that it will get close to 30% by 2030, and 50% by 2040. So, the demand associated with lithium, for that kind of EV growth is tremendous. Now, that being said, lithium carbonate prices are still below where they were in 2017. And so, there could still be room to go higher. As for uranium, well, you know, in the last bull market, chemical, which is a bellwether for the sector, it's gone from, it went from close to $60 to $22, right now. And so, there's still a lot of upside in that particular sector and commodity. So I think that while energy, fossil fuels are inexpensive, I don't necessarily think alternative energy is that overpriced.

Saldanha: Finally, one of the main reasons that investors especially retirees like energy stocks is the high dividend payouts that they've enjoyed for years, if not decades. Many of these alternative investments that you've highlight don't necessarily have payouts as high. So what could be a possible replacement for investors seeking income?

Piquard: Well, I'm surely not suggesting that investors go out and sell all their Canadian oil and gas exposure. You know, these stocks do generate good cash flows and good dividends and these oil prices, and you might even want to look at a covered call strategy on oil and gas since that could make sense since you can pick up not only the dividends, but some extra yield due to the covered call strategy and benefit from the high volatility of the sector. But what I am saying, however is that by owning these stocks, you could be missing out on the growth from zero emission energy driven by solar, wind and nuclear, and commodities such as lithium, hydrogen and uranium. And that's something you want to consider.

Saldanha: Great, thank you so much for joining us today with your perspectives, Nick.

Piquard: Thanks for having me.

Saldanha: From Morningstar I'm Ruth Saldanha.


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Enbridge Inc48.93 CAD-0.81Rating
Suncor Energy Inc54.47 CAD-1.93

About Author

Ruth Saldanha

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


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