Bay Street money manager Rob Lauzon thinks the recent rally in the energy sector may have more room to run.
In an interview Tuesday, Lauzon, the deputy chief investment Officer at Middlefield Capital Corporation, said a combination of economic reopenings and a shift in drilling sentiment at the global energy supermajors could be of further benefit to Canadian producers.
“The risk-reward right now looks pretty attractive, and even I’m considering adding to some of my favourite energy companies in Canada that pay dividends,” he said.
“We’re kind of in this goldilocks scenario where demand is increasing, notwithstanding what we’ve heard on electric vehicles and wind and solar: that’s all increasing, but not at a pace to displace the need for diesel and gasoline.”
Lauzon said that in this environment, firms like Canadian Natural Resources Ltd. and Suncor Energy Inc. could increase their dividend payouts. Lauzon said Middlefield currently holds positions in both of those stocks.
The TSX energy subgroup has been the top-performing sector in 2021, posting a 33.6 per cent year-to-date return, as of Monday’s closing values. That’s more than double the overall composite’s 14.9 per cent gain during the same period.
That rally has been broad-based, with all 23 components of the subgroup in positive territory for the year. The group has been buoyed by a resurgence in underlying commodity prices, with West Texas Intermediate briefly touching US$70 per barrel on Monday after surging more than 40 per cent and natural gas prices up 25 per cent, as energy demand rebounds due to economic reopenings.
While prices in that lofty range often prompt nimble large producers to increase production, Lauzon said recent activist activity at the likes of Royal Dutch Shell Plc, Chevron Corp. and Exxon Mobil Corp. could have the supermajors thinking twice before boosting output, putting a floor beneath prices to the benefit of others.
“The companies are being told by their investors [and] by regulatory bodies to, in effect, drill less and slow down the supply. So maybe this time it is a bit different, where typically high oil prices – US$80, US$70 – would bring on a gush of supply and end the party.”
“Maybe this time around the supply reaction isn’t going be there. So maybe we’ll have strong oil and gas prices here for many years.”
Lauzon said that while the supermajors may be reluctant to increase production to capture that demand, OPEC and Middle Eastern producers should still be on the minds of investors eyeing the Canadian energy sector.
“We all know OPEC, Iran have barrels in the ground that could come out at any moment, and over the next couple of years if that supply comes on and brings oil down to 50 dollars, not 70 dollars, it’s a whole different dynamic.”
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