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Canadian energy stocks have lagged as climate considerations have placed greater scrutiny on the sector. But one advisor says a window is opening for investors.Todd Korol/Reuters

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Whether oil prices have stabilized, and what that means for energy investments are two big questions portfolio managers are contemplating in the wake of a substantial production cut from the Organization of the Petroleum Exporting Countries (OPEC) and its allies earlier this month as investors balance the prospect of sturdier crude prices against deepening recession risks.

“We’re in a push and pull battle between those worried about demand and the global economy versus those worried about [oil] supply shortfalls,” says Martin Pelletier, senior portfolio manager at Wellington-Altus Private Counsel in Calgary.

Despite the multiple macro headwinds, a case is building among some observers for oil prices to remain elevated and even rise meaningfully. If economies can manage to eke out growth as crude supplies tighten, oil prices could be poised for a run well past US$100 a barrel, some analysts project.

“You have all these factors that are very, very supportive of [higher oil] prices,” says Amrita Sen, co-founder and director of research at Energy Aspects Ltd. in London.

Looming European Union sanctions on Russian oil set to begin on Dec. 5 are one.

“That tightness hasn’t even happened yet. The European embargo is about to kick in and that will lead to significant shifts,” she says.

China is another factor given that the world’s second-largest economy is not expected to emerge fully from its zero-COVID-19 policies until next spring, at which time oil will receive a “huge boost to demand.”

Yet, the biggest structural buy signal for oil investors is the massive US$500-billion-plus deficit in capital expenditures on new projects that just didn’t occur over the past decade, she says, leaving the global economy to rely on existing production capacity.

“This is the 8th year running of underinvestment and we continue to see oil demand rising,” Ms. Sen says. “Sure, there’s demand growth slowing, there are a lot more [electric vehicles], but oil demand isn’t going to go away anytime soon.”

As such, her firm, Energy Aspects, foresees Brent Crude reaching US$127 a barrel next year.

Mr. Pelletier adds there’s as much potential for a “melt-up” in pricing as there is for a meltdown.

“We’re overweight energy still. I’m bullish on energy and using it as an inflation hedge, as a portfolio hedge,” he says, noting that oil and related investments comprise anywhere between 10 to 15 per cent of his managed funds.

‘Lean’ Canadian producers present opening for investors

The outlook for Canadian producers is relatively stable as well with oil sands producers, in general, demonstrating a disciplined approach to capital allocation despite robust cash flow generation right now.

“These companies are being very cautious. They’re in a much better position financially than they were in previous cycles,” Mr. Pelletier says.

Barring a collapse in oil markets, Canadian firms will weather a cyclical retracement of benchmark prices, he adds.

“They’re using the tremendous amount of cash flow being generated by current pricing to do things like pay down debt, do buy-backs and [maintain] dividends,” he says. “Maybe they cut back on some of the buy-backs or debt-reduction but there’s a lot of room with current cash levels, certainly, to support the dividends that are being paid.”

Jennifer Tozser, senior wealth advisor and portfolio manager at Tozser Wealth Management with National Bank Financial Wealth Management in Calgary, says oil sands companies are “very lean now.”

She concedes Canadian energy stocks have lagged as climate considerations have placed greater scrutiny on the sector, but notes a window is opening for investors.

“You have mutual fund managers, pension plans, all of these institutional players saying, ‘We are not buyers of these.’ But from any kind of fundamental view, you should be buying,” Ms. Toszer says.

“They’re cheap, we’re going to have elevated prices for the foreseeable future and look at the size of the dividends and quality of the companies.”

The longer that oil stays in this range, the greater the upside to energy stocks, which could be “material upside,” adds Mr. Pelletier of Wellington-Altus.

“Canadian producers are discounting in a US$50 to US$60 oil price instead of US$85 to US$95. That’s the trade I’m playing,” he says.

Is it a policy-driven market?

Meanwhile, RBC Capital Market analysts say while the OPEC decision was a proverbial “bazooka” used by the cartel to set a floor price, there’s certainly no guarantee it will work.

This heavy-handed approach is not necessarily the “flashing buy signal” some investors think it is, says Michael Tran, managing director, global energy strategy at RBC Capital Markets.

While economic headwinds remain the central worry, policymakers have become almost as unpredictable, Mr. Tran said in a research note. Policy decisions are likely to drive turbulent price action in the months ahead.

“Market participants loathe trading a policy-driven market,” Mr. Tran says. “We anticipate that risk deployment will remain low through the coming months, which results in lower liquidity and volatile pricing.”

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