Bull energy market has room to run

The Canadian energy bull market continues to show strength, supported by favourable supply-demand dynamics and a shift toward shareholder-friendly strategies.

“We’re probably in the middle innings of the current cycle,” said Daniel Greenspan, senior analyst and resource team director with CIBC Asset Management, in a recent interview.

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Since early 2020, Greenspan said, the Canadian energy sector has experienced a cumulative return of 140%, outperforming the broader S&P/TSX composite, which returned 76% during the same period.

Amid ongoing geopolitical uncertainties, oil prices have largely settled into a “healthy” range of $70 to $80 per barrel, he noted. And given supply and demand considerations, “the current oil price cycle has some legs,” he said. 

Expected interest rate cuts will stimulate key economies like the U.S., supporting oil demand, he said. Additionally, economic data from China, including recent growth rates, have shown improvement, further supporting demand expectations.

Meanwhile, the supply side has been consistent. “We’re seeing OPEC [Organization of the Petroleum Exporting Countries] stick to the script and manage the supply side to balance the market,” Greenspan said.

And, despite the transition to a low-carbon economy, Greenspan said he expects demand growth over the medium term. 

“Throughout the last 40 years, demand for oil has largely mirrored GDP and population growth, with both expected to continue their upward trajectory,” he said.

Longer term, “decarbonization is on a longer timeline than most people expect,” he said, citing the infrastructure required for the production and distribution of green energy.

At the same time, “we don’t expect the supply side for oil to continue investing in long-term growth to support a market that eventually will be in structural decline,” he said.

As a result, he expects the market to remain tight in terms of supply and demand. “In other words, we don’t expect oil to go out with a whimper,” he said. 

Additionally, Greenspan highlighted that energy companies have become more shareholder-friendly.

With debt becoming more expensive and equity markets less receptive to energy, Greenspan said companies are prioritizing capital return to shareholders over aggressive growth initiatives. It’s no longer “growth at all costs, but rather a focus on measured and sensible growth with shareholder returns and focus,” he said. 

This shift is reflected in companies fixing their balance sheets and allocating free cash flow toward dividends and buybacks, signalling a positive trend for investors.

“As net debt targets get hit, more capital is being allocated to shareholder returns,” Greenspan said. “This theme of capital return in the energy sector continues to have legs from here, as companies are generating meaningful free cash flow at current oil prices.”  

The proof is in the numbers, he said: “Investment in growth has not recovered to anywhere near the peak levels we saw in the previous decade, while dividends and buybacks have hit peak levels not seen before in this sector.”

From an ESG perspective, Greenspan said most companies have made medium-term commitments to reduce greenhouse gas emissions from operations, with longer-term commitments toward achieving net-zero emissions. 

“The path to achieve net-zero remains unclear,” he said. ”But there are steps being put in place to work toward that ultimate goal.”

Notably, initiatives like the Pathways Alliance, which comprises Canada’s largest oilsands companies, are working toward carbon capture and storage solutions for emissions produced from oilsands production, with the aim of achieving net zero. 

In terms of stocks he likes, Greenspan named Cenovus Energy Inc. and Crescent Point Energy Corp. as potential investment opportunities within the Canadian energy sector. 

He cited Cenovus’s performance, potential for further operations optimization, and significant dividend growth prospects relative to peers. And he described Crescent Point as “a value opportunity” in the mid-cap space, with a favourable outlook on debt reduction and increasing shareholder returns.

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