The Stone Age didn’t end for lack of stones.Even as governments around the globe take steps to shut down the oil and gas sector, at least one major investment house is touting Canadian oil as the last, best barrel for global investors even as the world transitions from fossil fuels. Especially as the world transitions from fossil fuels.That’s because the Canadian oil and gas sector enjoys a relatively stable cost structure that makes it resilient to what is sure to be a “turbulent” and “volatile” transition to renewable energy, writes Stu Morrow, chief investment strategist of Morgan Stanley Wealth Management Canada.“We believe that Canada’s Oil & Gas industry can play a critical role in energy transition over the coming decades despite a less enthusiastic view from the market,” he said. “While (net-zero) implies major shifts in the energy sector, we believe that Canada’s energy sector may provide investors with sustained dividend and capital appreciation over the coming decade, assuming a reasonable outlook for the price of oil.”.“There is potential for large divergence between what will happen and what policymakers wish to happen. As such, we believe that energy exposure may potentially hedge portfolios against a wide range of outcomes”Stu Morrow, Morgan Stanley Wealth Management Canada.“On the other side of an energy transition lies a new, stable system, but the interim entails risks that may be hedged with continued exposure to the energy sector,” and specifically, Canadian oil.That’s because Canadian energy producers do not need a high price of oil to be sustainable. Morrow’s analysis suggests the producers can sustain capital expenditures, meet dividend payments, net zero emission targets and retire outstanding debt with a minimum price of US$65. On Thursday morning, North American benchmark West Texas Intermediate (WTI) was trading north of $89 per barrel, up 75 cents in morning trading. European Brent crude was above $92.That said, Canadian energy is trading at the steepest discount to long-term average valuations relative to any other sector in the S&P/TSX Composite Index and even on global exchanges including the New York Stock Exchange. That’s despite the fact dividend yields and free cash flow is about 2.5X the US and Canadian producers have less debt from years of retrenchment.“We believe this pessimistic outlook reflects significant uncertainty related to the future demand for oil and gas, but at the same time, does not reflect the potential for narrowing West Texas Intermediate and Western Canadian Select crude price differential over the near-term (due to the Trans Mountain pipeline expansion) or a decline in growth investments of renewable technologies over the long-term,” Morrow said..The global outlook on oil demand is founded on an implied global transition away from combustion engines towards EVs and any disappointment could lead to a strong price response in oil..Although the amount of oil as a share of the world’s GDP has declined — and will continue to do so as both production and consumption become more efficient — net demand continues to rise and will continue to due so even as the world transitions away from fossil fuels.That’s due to a combination of higher population growth, and indeed, continued economic expansion in developing countries such as China and India.“Furthermore, (Morgan Stanley’s research) believes that should energy-use per capita continue to rise in tandem with above-average consumption in select geographies, the total energy demand curve will be upward sloping.”Add in an uncertain uptake in so-called ‘clean’ energy technology and it’s a recipe for success.“There is potential for large divergence between what will happen and what policymakers wish to happen. As such, we believe that energy exposure may potentially hedge portfolios against a wide range of outcomes,” he said.
