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Brian See, portfolio manager, CIBC Asset Management.
For the Canadian oil sector this year, things are going to be challenging for companies. Namely, because they are facing weak oil prices and not enough demand or effectively no demand due to virus concerns. For the remainder of the year, the biggest thing that the Canadian oil sector and companies are going to be facing is liquidity. What that means is the 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. That’s going to be the key thing for producers to withstand a period of low prices.
The other thing that the Canadian oil sector is going to have to look at is effectively shut-in economics. And this means that for every company they’re going to be having to assess their assets and various plays and whatnot, and determine which ones are simply not economic and not contributing and shutting in that production. And this is key just to protect the balance sheet and the future viability of the company: those that are surviving the pandemic, namely through ensuring that they’ve got enough liquidity to keep company operating as a viable concern.
This is just a few things: cutting down costs across the operations, reducing G&A; a lot of companies have taken salary cuts to save every dollar; becoming more efficient with their operations; and, really, just closing off on economic assets that simply don’t function in a low-price environment.
While everything has to be done right now to save the company, it’s also a good time to find those efficiencies that could be used when times do actually recover. And that’s something that shouldn’t be forgotten, during this time of survivorship, is that the behaviours today are going to help influence the future outlook for these companies in the future when the cycle does return.
We’re focused on shifting the portfolio, starting with which subsectors would actually survive drops in demand. When we’re looking at the energy outlook, or energy in general, the companies or subsectors in the best position are the utility sectors and, likely, the midstream sectors. Utility sectors is, simply, because that utility bills are simply still going to get paid by the end customers. And these resources, whether they be electricity or natural gas, are still going to be consumed. We like that sector in weathering this downturn. We also like midstream companies with big strategic assets and significant taker pay contracts. We still think these are also viable entities because, even in the low downturn, contracts often still get paid to midstream entities. These are two areas that we like in order to weather that downturn.
Companies we like in this downturn, that are positioned well: we like American Waterworks, which is a water utility in the U.S. that is in the business of distributing water, but also replacing the water pipes across the entire country. We think it’s a defendable business model with long runway in terms of growth and replacing a source that is required for the population. They’re still able to collect bills even during this downturn. That’s one thing we like.
Another name we like is Northland Power. They’re an offshore wind renewable company. We think that’s also a good area because, as we said before, utilities and bills still get collected. And that company is providing energy to its customers. They’re mainly resilient from all the Covid issues that we’re seeing plague other industries. Those are a couple of defensive companies we look at.
In terms of actual energy companies that we also like in the portfolio, we like Tourmaline. The reason being is, with all the oil that’s going to be shut in, this inherently shuts in natural gas as well. Natural gas prices are going to be supportive and, Tourmaline, quite a large natural gas producer in the country of Canada, they’re going to be benefiting and have the flexibility to shift the portfolio to other resources like gas. We think that looks attractive.
Another than the name that we like is Cenovus. While they’re facing the challenges of oil today, we think that their liquidity, that they have been able to gather, as well as the low cost asset base, are going to be able to allow them to weather the storm for long periods of time. And given the valuations that we’re seeing, we like the future optionality of that company.
The companies that are at risk right now are really the companies that have extremely high leverage and weaker balance sheets. Those companies that came into the downturn operating at higher levels of leverage are definitely more prone to the downturn, in addition to which, those companies with assets on the marginal end of the cost curve are also going to be at risk in terms of the oil downturn that they’re facing. For those reasons, we tend to avoid those types of entities that are highly leveraged and marginal assets and are effectively not the low cost operator. Those companies, just like in any downturn, are the most suspect in order to make it out of these low price periods, because you never know how long it lasts for. And generally we just simply avoid those companies even during the good times of the commodity cycle as well.
How we are adjusting the fund as we go forward? We’re still cautious because of the demand and supply factors haven’t come into full balance yet.
But, when we look at valuations out there, we still think it’s a really good time to pick away at oil stocks when oil is getting effectively no bid, because it is a commodity that is still being consumed every single day by people. When demand does come back, people still drive cars, people eventually will fly in planes. We need to understand that that’s still consumed. And so, again, with that backdrop, we like companies that can withstand the volatility and be able to realize better cash flows when the oil cycle does return. One of the names that we do like is Cenovus because they’ve got enough liquidity with their low prices, have low cost assets, and will realize significant amounts of free cashflow when the cycle does turn.
- CIBC Energy Fund