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TD: In buying stake in Canadian oil producer, Buffett may be on to something

In this May 6, 2013 photo, Warren Buffett smiles during a television interview in Omaha, Neb. The annual charity auction of a private lunch with the billionaire investor has drawn bids of more than $2-million (U.S.) in each of the past five years, and last year it fetched a record $3,456,789.


A few big investors have been turning their attention to the Canadian energy sector recently, and analysts at TD Securities think it's a bullish sign. The most conspicuous move is by Warren Buffett, whose Berkshire Hathaway Inc. bought 17.8 million shares in Suncor Energy Inc. in the second quarter, according to disclosure documents revealed last week.

Earlier this month, Chevron Corp., through its Canadian subsidiary, increased its landholdings in Alberta's Duvernay shale formation for an undisclosed price. And Exxon Mobil Corp. and Imperial Oil Ltd. bought a $720-million (U.S.) stake in the Clyden oilsands lease from ConocoPhillips.

"We believe that these value investors (both equity and asset) may be on to something," TD analyst Michael Dembicki said in a note.

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Part of the attraction, he says, is valuation: Canadian intermediate energy stocks are trading at a discount to U.S. stocks for the first time in over two-and-a-half years, based on the ratio of enterprise value to debt-adjusted cash flow. But valuation is only one of a few things investors should be looking for – the other being strong balance sheets and signs of predictable growth.

His top oil stocks are Whitecap Resources Inc. and Crescent Point Energy Corp. His top gas picks are Peyto Exploration & Development Corp., Paramount Resources Ltd., Tourmaline Oil Corp. and Nuvista Energy Ltd. And his top "mixed" picks are Bonavista Energy Corp. and Enerplus Corp.

Signs of interest from investors, especially Mr. Buffett, come at a difficult time for Canada's energy patch. Rising U.S. production levels have taken the shine off demand for Canadian oil, which could have an uncertain export market over the longer term.

The energy subindex within the S&P/TSX composite index has essentially drifted sideways for the past four years and is down 35 per cent since 2008, even as the price of crude oil has moved above $100 a barrel. If big, respected investors see value in the struggling sector, the hope is that the worst is over.

But big names go only so far. Pretty soon, Canadian energy companies are going to have to deliver on expectations.

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