Finance Why now: understanding the current opportunity in energy The energy sector is certainly not an emerging part of the economy ‒ in fact, the history of Imperial Oil, one of the most established of all publicly traded Canadian energy companies, stretches all the way back to 1880. But, over the past several years, a number of trends and economic events have emerged to create a set of intriguing new opportunities for both Canadian energy companies and their counterparts around the world. Structural demand The global population continues to rise, and the industrialization of developing countries continues apace. Add to that the rapid electrification of transportation and other sectors, and you have a very strong argument that the long-term, fundamental need for both traditional energy sources and renewables will only increase for many years to come. Energy security We live in a time of heightened geopolitical tensions: witness the ongoing war between Russia and Ukraine, continued Middle East strikes and counter-strikes, sabre-rattling by China and elevated tariff and trade arguments around the globe. All of this conflict has highlighted – for many countries – the strategic importance of investing in domestic oil and gas supplies, renewable energy and even nuclear power. For investors, this renewed interest in secure, “home grown” energy has opened up a number of intriguing opportunities around the world that might not have been considered a decade ago. Years of underinvestment At the end of the last energy cycle (approximately 2014-2015), many energy companies severely cut capital spending and exploration budgets in order to emphasize cash flow, debt reduction and shareholder returns. After several years, reductions in capital spending have now reached the point at which lack of investment may constrain future supply. This has the potential to support higher prices and stronger cash flow for many producers ‒ at least until the industry starts investing in exploration and production again. The energy transition The world has a climate-change problem. And renewable energy – wind farms, solar arrays, hydroelectric dams, geothermal projects, battery storage and even carbon capture technology – is increasingly seen as part of the solution. Despite the best efforts of some governments to delay or derail the expansion of renewable energy projects, the build-out is accelerating. All of this has created some intriguing opportunities for investors, particularly as the costs of renewable technology come down over time. The nuclear renaissance Closely related to the above is the so-called nuclear renaissance: a renewed appreciation for nuclear power as a clean, economical, “always-on” energy solution that can complement more intermittent wind and solar power. In recent years, China, India and Russia have started building new reactors, while countries such as Germany and Japan are restarting previously mothballed ones. That means good times ahead for uranium miners, nuclear utilities and the engineering firms which design and build nuclear plants. Power-hungry AI You may have heard about the massive energy needs of artificial intelligence: a typical AI data centre requires as much electricity as it takes to power 100,000 or more homes; the much-larger versions being built today may require more than 20 times that amount. To meet our insatiable demand for all things AI, investors expect strong demand for natural gas, renewable energy and power plant infrastructure to continue for many years. How to invest: different ways to put your money to work in energy If you’re an investor in Canadian index funds or market ETFs, you probably already have some exposure to the energy sector. The same goes if you’ve paid into the Canada Pension Plan for some years: the CPP has long been an investor in some of Canada’s best-known energy companies (both conventional oil and gas as well as renewable energy). If you’re looking to add to your exposure, however, you have several options, including: Exploration & production (E&P) companies These are the companies that many investors think of when they think of the energy sector: the companies that are actively engaged in finding and extracting oil, natural gas and natural gas liquids (propane, butane and similar molecules) from the earth. They range from large, established, multinational producers with long histories and production around the world to small, highly speculative startups hoping to strike it rich with new wells. Because the price of their product is directly connected to the price of the underlying commodity, the stock prices of E&P companies can be among the most volatile in the sector, often rising or falling dramatically in a single year, or quarter, or even in a single trading day. Energy transportation and infrastructure Think pipelines, energy storage facilities, export terminals and processing plants. Unlike the E&P companies, energy infrastructure companies generally offer stable cash flow, with fee-based revenue based on long-term contracts rather than direct exposure to underlying commodity prices. They also tend to have an economic “moat” around their assets; given the costs and permitting challenges of building additional pipelines and infrastructure, those fortunate enough to have existing assets are somewhat protected from competition. These qualities can make them excellent choices for conservative investors looking for reliable dividend income. 28 | www.snowbirds.org
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