American investor interest in Canada's oil patch is growing, a trend driven by friendlier rhetoric from the federal government and a belief that industry north of the border will more reliably return money to them in the years ahead.
Jeremy McCrea, managing director of Calgary-based BMO Capital Markets, described the trend as a “rotation,” with more investment coming from the U.S. and a slight decline from Canada.
Bye decline in oil prices Overall, while holding back investments to some extent, many portfolio managers still want to hold some energy stocks and see more potential in the Canadian sector compared to the U.S., he said.
“You're seeing more American investors saying, 'If we have to hold energy, we'd rather keep Canadian energy here today,'” McCrea said.
U.S. funds now own about 59 percent of Canadian oil and gas companies, up from 56 percent at the end of last year, he said. Meanwhile, Canadian ownership of these companies fell from 37 percent to 34 percent.
Calgary oil executives are seeing this trend play out in their own companies.
Grant Fagerheim, CEO of Whitecap Resources, said about 66 percent of his company's institutional holders are now in the U.S., up from about 60 percent at the end of last year.
“It’s quite remarkable,” he said.
Brian Schmidt, CEO of Tamarack Valley Energy, said he believes Canadian investors, especially pension funds, are still hesitant about investing in the oil and gas sector, but U.S. investors don't feel the same reluctance.
If he's visiting an American city, “I might fill a day or two with meetings,” Schmidt said. “I can't do this in Canada.”
He rated that the U.S. share of his company is now about 40 percent, up from 20 percent before the COVID-19 pandemic.
Change tone
McCrea said the shift in investment began to gain momentum about a year ago when federal Conservatives leading in polls and the promise of major political changes in promote growth oil and gas sector.
Although the federal Liberals were ultimately re-elected, Prime Minister Mark Carney promised in his election night speech make Canada an energy “superpower”.
Asked by CBC Power & Politics host David Cochrane about separatist sentiment in Alberta, Prime Minister Mark Carney said his government is “committed” to working with Canadians across the country.
“There's been a bit of a change in tone that makes investors feel more comfortable coming to Canada,” McCrea said.
Schmidt said the completion of the Trans Mountain Pipeline expansion has also boosted investor interest by increasing the sector's export capacity.
Part of the increase in interest is also due to the relative economics of oil fields in Canada and the United States.
In the United States, most oil production still comes from oil wells. When wells are depleted, new ones have to be drilled. This costs money and may not be worth it for companies depending on oil prices.
Recent US oil company survey found that most companies needed a price of about US$65 per barrel to justify drilling a new well. Meanwhile, oil prices are expected to hover below $60 a barrel through the end of this year and average around $50 a barrel through 2026, according to the U.S. Energy Information Administration.
Earlier this month, the CEO of one of the largest U.S. oil producers said he expected his country's output would likely decline. stall if the price of oil continues to fluctuate at current levels.
'Attractive' future for oil sands
The economics of drilling new wells in the US are worsening as the country's main oil field, Texas' Permian Basin, becomes increasingly depleted. Now more water and gas are being produced here, and less oilThis means new wells will likely generate diminishing returns.
By comparison, most of Canada's oil production occurs in oil sands. Oil sands projects require large initial implementation costs, but once completed they can operate at low costs for several decades.
In recent years, Canadian oil producers have become less focused on building new oil sands projects and instead opted to return more money to shareholders, which has attracted investors on both sides of the border.
“We're seeing these companies generate a lot of cash and return almost all of it to shareholders,” said David Samra, a portfolio manager in Boston. with Milwaukee-based Investmentment firm Artisan Partners, which invests in Suncor Energy.
“This is the future we see, and we find this future very attractive.”
BMO Capital Markets' McCrea said it was unclear how big the trend could become, but overall the future looked “encouraging.”
As for Whitecap Resources' Fagerheim, he said he believes investors in Europe and Asia, like their counterparts in the United States, are increasingly eyeing Canadian oil.
“The world took notice too,” he said.
