Oil supply is 'gravely ill' in both the short and medium term: Canoe Financial’s Rafi Tahmazian
Being an energy fund manager in Canada hasn’t been for the faint of heart for several years, and that was cemented in 2020 when the price of West Texas Intermediate crude plunged into negative territory for the first time in history in the early months of the COVID-19 pandemic.
Investors in Canadian energy have dealt with everything from oil market collapses, to plummeting stock prices, to political (and legal) roadblocks, to climate concerns.
Yet Canadian energy fund managers who have stuck to their guns have learned to adapt, to calm client nerves, and perhaps most importantly, figure out where opportunities still exist in the sector.
And this year, they’re being handsomely rewarded.
“I was sitting at my desk on a special day in March of last year watching my fund fall 40 per cent in a day. Cenovus – not a small company – was down 50 per cent in a single day. When you feel like throwing up at the sheer quantum of money that you just lost, temporarily at least, for your clients, absolutely I think every successful money manager questions themselves sometimes,” said Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, in an interview.
Nuttall, who has nearly two decades of experience in energy-focused money management, is no stranger to fielding frantic client calls during oil downturns. His main concern during the height of the pandemic was clients selling their holdings out of fear and thus locking in a “generational loss.”
“That’s why I was very public throughout most of last year, more so than I think anyone else, because my primary goal was to keep people in the trade. I thought while the extent of the collapse was profound, I was extremely confident we were going to rebound, though the timing was uncertain,” he said.
KEEPING THE FAITH
During tumultuous times such as the pandemic, he said emotion must be sidelined so data and logic can remain your compass.
“As long as your clients are willing to stick with you -- and I’ve got the best clients on the planet, they’ve stuck with me and many of them added materially through the dark days of 2020 -- so long as a fund manager you have that staying power and you don’t have to worry about redemptions: you stick to the data, you push down your emotions. At the end of the day, I think you’ll come out looking okay,” Nuttall said.
2020 was the second time in seven years that oil prices collapsed. Crude traded at more than US$100 per barrel in 2014 and fell below US$30 per barrel in early 2016 amid a Saudi-led price war.
During that time, not only were declining commodity prices a problem for Canadian oil, the sector was also dealing with the renewed influence of politics, as well as international producers ditching their oil sands exposure, and investors’ awareness about the environment.
“We spent pretty much 2015 until the fall of 2019 treading water. Talking to clients, saying we’re redefining who we are, we’re expanding ourselves,” said Rafi Tahmazian, senior portfolio manager at Canoe Financial where he runs three energy-focused funds.
Tahmazian was born into an energy family and spoke to BNN Bloomberg via phone from Calgary, four blocks from where he grew up. He has spent decades building his expertise of the oil and gas industry.
When many investors were reeling from the decline in Canadian energy stocks throughout the oil crash of 2014, Tahmazian began researching international oil markets, alternative energy and energy technology.
“In 2015, we started to go beyond the white picket fence of Western Canada and we expanded to the point where we had over half of our investments in our long-only fund exposed to foreign energy investments while Canada was in this pipeline debate and debacle that was causing it to be a place not to put capital. So you had to be able to go outside,” he said.
Explaining the new strategy to clients was not always easy.
“It takes a lot of work and sometimes what comes out of our mouths sounds like we’re speaking in tongues to people,” Tahmazian said. “Once you’re in a quiet environment with people and you can talk frankly and ask questions comfortably […] then you start to understand what people are really asking and what they’re confused about.”
BULLISH ON CANADA
That’s how Nuttall described the number of times he’s been fed up with the wild volatility and disruptions in the energy sector over the years, yet he still takes an optimistic view of Canadian oil producers.
“Our companies are superior, our valuations are cheaper and the only thing global investors want today is return on capital; and the variables that allow that are low decline rates, long reserve lives, low leverage,” he said. “When I look at the ability of our large caps today to potentially buy back 20 per cent of their shares outstanding a year using free cash flow, or have a 10 per cent dividend and a 10 per cent buyback – those are very realistic objectives for these companies even at US$70 oil.”
After a dismal 2020, Canadian energy stocks have come roaring back. Through the close of trading Thursday, the total return of the S&P/TSX Energy Index was 51 per cent year-to-date, compared with 22 per cent for the broader index.
“I think we’ve reached the tipping point where it’s far too painful for the generalist to no longer be invested in the sector and you’re starting to see those people, whether or not they’re kicking or screaming, they’re being pulled back to look at the sector,” Nuttall said.
Tahmazian agreed that Canadian energy companies have done a good job at cleaning up their balance sheets and becoming more efficient. And in 2019, he took a positive view on Canada once again.
“As we saw the shakeout on the other end, the gig was up for shale oil in North America. As soon as we figured that out, we became bullish on Canada,” he said.
Despite the sector’s trials and tribulations, Tahmazian said he is now “almost excited” by corrections.
“How long have I been energy-focused? All my life is the answer. It’s what I do and what I believe in,” he said. “I shudder at the thought of trying to invest in another industry because it’s taken me 30 years to develop the confidence I have in this one.”