Finding energy winners in a crisis

Canadian oil producers can’t seem to catch a break.

As prices rebound from April’s record lows and the International Energy Agency indicates a slight improvement in the commodity’s outlook, one of the world’s largest investment funds said it was excluding large oilsands producers on environmental grounds.

Last week, Norway’s sovereign wealth fund said it would stop investing in Calgary-based Canadian Natural Resources Ltd., Cenovus Energy Inc., Suncor Energy Inc. and Imperial Oil Ltd. because of greenhouse gas emissions.

It’s the latest hit to a sector reeling from the pandemic’s impact on oil prices and more long-standing challenges with getting product to market.

“The companies that are at risk right now are really the companies that have extremely high leverage and weaker balance sheets,” said Brian See, a vice-president and equity analyst at CIBC Asset Management, in an April 29 interview.

See, who manages the CIBC Energy Fund, said he generally avoids companies that are more vulnerable to downturns — even during the commodity cycle’s good times.

Oil companies have responded to lower prices by cutting capital spending and, in some cases, cutting or suspending dividends. Cenovus Energy, which reported a $1.8-billion loss in the first quarter, said it was cutting salaries in addition to reducing capital spending and suspending its dividend payments.

See named Cenovus among the producers he still likes.

“While they’re facing the challenges of oil today, we think that the liquidity they have been able to gather, as well as the low-cost asset base, will allow them to weather the storm for long periods of time,” he said.

Liquidity will be the biggest challenge for companies this year, See said.

“What that means is companies have to ensure that they’ve got enough cash on hand, access to credit facilities or debt markets, or any other forms of cash, just to remain financially viable and be able to protect their balance sheet and be able to fight for another day,” he said.

“That’s going to be the key thing for producers to withstand a period of low prices.”

The federal government last week announced its long-awaited aid for large companies, including those in the oil patch. The Large Employer Emergency Financing Facility will provide bridge financing to companies whose financial needs aren’t being met by conventional credit so they can stay open and keep employees on payroll.

Companies that receive financing will be required to publish annual climate-related disclosure reports consistent with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. These reports must include details on how the company’s future operations will support environmental sustainability and national climate goals.

See said the subsectors best positioned to survive drops in energy demand related to the pandemic are the utility and midstream sectors. He likes American Waterworks, a U.S. water utility that will go on collecting bills during the downturn, and Toronto-based wind renewable company Northland Power.

See also noted that while many companies are focused on surviving, the crisis provides an opportunity to find efficiencies that can carry on past the recovery.

On Friday, rating agency DBRS Morningstar said the “fog of market uncertainty is lifting” for crude oil as it updated its forecasts.

In its base case, DBRS forecast West Texas Intermediate to average US$32 per barrel this year, rising to US$40 next year and US$50 in 2022. In its stress case, WTI averages US$26 this year, US$35 in 2021 and US$40 in 2022.

Longer term, DBRS forecast mid-cycle pricing of US$50 to US$60 per barrel.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.