The oil and gas sector has fallen out of favour with many investors, but top bankers at BMO Nesbitt Burns say the rhetoric about it being a “sunset industry” is overblown.
In fact, the Bank of Montreal-owned investment dealer sees an opportunity to snap up market share in the U.S. energy sector as other investment banks retreat, Pat Cronin, the chief executive of BMO’s capital markets arm, told The Globe and Mail in an exclusive interview.
“It’s one of those sectors that we think has a lot of longevity, notwithstanding what people may think about the commodity itself,” Mr. Cronin said.
A protracted downturn in energy prices combined with a growing focus by institutional investors on climate-related risk has hurt the valuations of oil and gas producers.
But as the price of oil has begun to recover – U.S. West Texas Intermediate climbed above US$70 a barrel in May for the first time since 2014 – the stock prices of oil and gas producers have not followed suit.
“This is a sector that’s been beaten up and in the bottom of the cycle for a while,” Mr. Cronin said.
“There’s a lot of speculation around when that cycle will turn. It feels like it is, from a commodity price perspective, but the stock prices haven’t kept pace. Our view is that this is a really opportune time for investors to be coming back into the equity markets.”
A number of European banks have been hesitant to finance new fossil-fuel projects. HSBC, Europe’s largest bank, announced in April that it would mostly stop funding new oil sands projects, coal power plants and arctic drilling. Amsterdam-based ING Group and Paris-based BNP Paribas made similar announcements last year.
“We actually see an opportunity when others are exiting or pulling back from the space to actually pick up market share,” Mr. Cronin said. He added that much of the investment dealer’s expansion south of the border, beyond energy, has been driven by a similar strategy of chasing after market share that European firms pulling back from the United States have abandoned.
Mr. Cronin says a catalyst is needed to get investors to jump back into energy, but once that occurs, the industry should benefit from momentum.
“It feels like there’s a good opportunity here to get ahead of what’s going to be a rally in the equity prices,” he said.
It’s no surprise that banks and investors lost their appetites for energy stocks. The recent downturn in the sector is the worst that Shane Fildes, the head of BMO’s energy group, has seen in his 25 years in the business.
“No question, it’s been an ugly time,” Mr. Fildes said. “It’s human nature to say, ‘Well, I don’t want to do that again.’”
However, Mr. Fildes said such a view overlooks the fundamentals of the business – namely, rising energy demand as global economic activity shifts into higher gear after the financial crisis.
“We’re very far from peak oil demand,” Mr. Fildes said.
But Canadian energy producers still face numerous business challenges, among them a lack of infrastructure such as pipelines to get their product to market.
Boosting the export capacity of Canadian energy producers is key to ensuring that Canada remains globally competitive, BMO’s chief executive Darryl White said in an e-mail.
“We continue to support sensible and conscientious energy and pipeline development in Canada,” Mr. White added.
Meanwhile, investors can expect to see the energy sector dipping its toes back into the public markets over the coming months, as private-equity backers who swooped in during the energy downturn seek to recoup their investments.
“We’re likely to see the first energy IPO coming out of the U.S. market this summer,” Mr. Fildes said. BMO is involved in that deal, details of which have not yet been made public.
“That, I think, is going to be a good indicator of where is the market demand.”
Alexandra Posadzki