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One advisor says pipeline companies such as Enbridge give investors exposure to the energy sector with a little extra protection against commodity price swings.Nick Oxford/Reuters

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As market participants look for other places to invest their money besides technology stocks, energy is one of the sectors getting some attention. The price of oil has been climbing steadily for the past few months, which should help boost producers’ profitability.

Furthermore, the dividends most of the companies in the sector pay are attractive to many investors. However, some money managers are cautious about committing to the sector.

“Despite more than a year of recessionary fears, the demand for oil today is at its highest point in history,” says Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners LP in Toronto, who manages two energy-focused mutual funds.

He notes that OPEC+ is curtailing oil exports to draw down global inventories and negate the massively negative impact of the largest release in history from the U.S. Strategic Petroleum Reserves. Given ongoing strong demand, he expects global oil inventories to end 2023 at the lowest point in more than eight years and fall even further in 2024, placing significant upward pressure on the price of oil.

When choosing investments in the sector, Mr. Nuttall says, “The only energy stocks that I want to own are Canadian heavy oil and oil sands companies. They have the longest reserve lives in the world, their strongest balance sheets in history, are gushing record amounts of free cash flow at current oil prices, and have committed to reaching final debt targets in the coming quarters.”

He also highlights plans for these companies to return 75 to 100 per cent of that free cash flow back to investors in the form of share buybacks and/or dividends. His top picks that match these criteria are Baytex Energy Corp. BTE-T, MEG Energy Corp. MEG-T, and Cenovus Energy Inc. CVE-T.

Threat of recession

Brianne Gardner, senior wealth manager and investment advisor with Velocity Investment Partners at Raymond James Ltd. in Vancouver, says the energy sector is typically a strong performer late in the economic cycle, but it can shift quickly if a recession does materialize and demand slows.

“We still see a tactical opportunity in energy at least in the short term as a recession keeps getting kicked down the road,” says Ms. Gardner.

She notes oil and gas stocks have been outperforming this summer as the price of crude climbs. And with the “Magnificent 7″ technology stocks starting to pull back, she wouldn’t be surprised to see a rotation in leadership in the second half of the year with sectors such as health care, utilities, and energy showing promise.

Although Ms. Gardner says energy companies in Canada also offer some decent dividends and strong profitability, she generally doesn’t consider oil and gas as a stable industry. That’s because companies have no control over their own product’s selling price, so profits can be more volatile.

“So, we rent, not own, this space and, often, our view is to underweight this industry,” she says.

In terms of specific stocks, Ms. Gardner favours some of the larger names such as Chevron Corp. CVX-N, Exxon Mobil Corp. XOM-N, Schlumberger NV SLB-N, Enbridge Inc. ENB-T, Suncor Energy Inc. SU-T, and Canadian Natural Resources Ltd. CNQ-T.

She notes pipeline companies such as Enbridge give her clients exposure to the sector with a little extra protection against commodity price swings. Enbridge has taken steps to become the largest natural gas provider in North America through its purchase of three U.S. companies from Dominion Energy for US$9.4-billion.

‘Not bullish’ on oil

Brian Madden, chief investment officer at First Avenue Investment Counsel in Toronto, says his firm’s view “is that oil is not really in a bullish market.”

He notes the firm would be more positive on investing in energy stocks if oil were to get above US$87 a barrel sustainably.

“If the commodity can convince us that it wants to trade bullishly then we’ll get more constructive on the sector,” he says.

Mr. Madden says he feels the economy is slowing and a recession is likely; and as oil is a cyclical commodity, it’s “tough” for it to rally in a recession. He also adds that the price of natural gas is “terrible” and may have fallen to a level that will lead suppliers to cut back on production.

Mr. Madden says his firm’s approach to the sector is “rifle shots, not shotgun blasts.”

“Because we’re not really bullish on the commodity, we want to buy ‘best in breed’ – the low-cost producers, the ones with the best capital discipline and the best management team,” he says. “And, those don’t necessarily correspond with the largest names in the sector.”

The companies his firm recommends are Tourmaline Oil Corp. TOU-T for exposure to natural gas and Parex Resources Inc. PXT-T for exposure to crude oil.

“Both are almost fanatical about capital discipline,” he says, adding Tourmaline has paid almost $10 a share in special dividends since the beginning of 2022, which is not the norm.

“Parex is not well-known or well-owned by investors because even though it’s listed on the Toronto Stock Exchange and headquartered in Calgary, all of its producing assets are in Colombia,” he says. “So, there is a bit of political risk there, but the company has brought in an experienced new chief executive officer, initiated a dividend, and continues to buy back stock.”

In the more broadly defined energy space, Mr. Madden is also positive on Cameco Corp. CCO-T, which produces uranium used for nuclear energy. Ms. Gardner shares that positive view on uranium as well as other cleaner energy sources.

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