Last June, Warren Buffett’s Berkshire Hathaway surprised a number of investors by sinking more than $500 million into Suncor Energy (NYSE: SU), one of Canada’s largest oil-and-gas companies.
To Americans, it may have seemed like just another one of the Oracle’s undervalued plays, but it got a lot of long-suffering Canadian energy fund managers excited. This once booming sector has been underperforming over the last few years, and Berkshire Hathaway’s bet could be a signal that it’s finally coming back to life.
Since 2009, U.S. oil-and-gas producers have dramatically S&P Oil & Gas Exploration and Production Select Index outperformed Canadian ones. The index is up about 150 percent over the last five years versus 30 percent for Canada’s S&P Capped Energy Index.
While Buffett hasn’t said explicitly why his company bought nearly 18 million shares of Suncor, it’s likely this underperformance played a part in his buying decision. The shares are up 17 percent since June 30, and while he sold 5 million shares in December — for a gain of about 20 percent — he still owns nearly 1 percent of the company.
“He’s a deep-value guy and likes to buy businesses that are undervalued over the long term,” said Martin Pelletier, a fund manager with Calgary-based investment firm TriVest Wealth Counsel. “And Canadian energy has been in a sideways market.”
If you want to be like Buffett and his lieutenants then consider the Canadian energy space. This multibillion-dollar industry accounts for 6.8 percent of the country’s gross domestic product and employs more than 280,000 Canadians. It’s also a net exporter of oil and gas, with about 90 percent of its energy exports heading to the U.S.
With global demand for oil and gas only rising — the U.S. Energy Information Administration predicts energy consumption will jump by 56 percent between now and 2040 — the need for Canadian energy is going to continue to increase.
Today, Canadian oil-and-gas producers are less expensive than their U.S. counterparts, but the sector should offer plenty of upside to patient investors.
Boom on bust
It wasn’t long ago that the Canadian energy space was one of the most promising markets for investors. Between November 2000 and June 2008, the S&P/TSX Capped Energy Index climbed by 387 percent.
Things started changing when the U.S. struck black gold in North Dakota in 2008 and began producing more of its own oil. Investors — even Canadian ones — began looking for fast-growing buys south of the 49th parallel.
There are other reasons for Canada’s sluggish growth, including a large price differential between Western Canadian oil and West Texas Intermediate crude (WTI). While there’s always a bit of a gap between the two prices, in the fall of 2012, Canadian oil was $40 cheaper than WTI. That was unusually wide, said Pelletier, and it hurt a number of companies.
Most experts blame the gap on poor energy infrastructure — it’s becoming increasingly more difficult to ship oil from Canada to the U.S. Gulf Coast, and that’s causing a backup in supply. While some companies are now shipping oil by rail, many people think that if Keystone XL can get approved, the supply problem will be resolved.
“[The lack of infrastructure] has been a big factor, and it may be again,” said Les Stelmach, a fund manager with Franklin Templeton Investments, a global investment firm. “It’s impacted the ability of Canadian oil-and-gas producers to get oil to market, and that adds to the uncertainty.”
Investors have also been dismayed by the Canadian government’s hesitations around oil-patch buyouts. In July 2012, China’s CNOOC (NYSE: CEO) made a bid to buy Calgary’s Nexen for $15 billion, but no one was sure if the federal government would approve the purchase. It did, but Prime Minister Stephen Harper made it clear that the country’s biggest energy players, which control much of the country’s natural resources, weren’t for sale.
“That’s one of the reasons why Canadian energy valuations got eroded by a [couple of] multiple points,” said Craig Basinger, chief investment officer at Richardson GMP, a Toronto-based investment firm. “All of a sudden, a potential buyer is allowed to do a joint venture and that’s it.”
Long-term opportunity
Over the next two or three years, the U.S. shale oil play will continue to look attractive — especially for growth investors — but America’s boom times will come to an end by 2019, said Amir Arif, a Washington D.C.-based analyst with investment banking firm Stifel, Nicolaus & Co.
There are already signs that the U.S. light-oil market is becoming oversaturated, said Arif. Historically, Louisiana Light Sweet Crude has traded at a $1 or $2 premium to Brent Crude, but American crude is now $10 cheaper than European oil. That’s partly due to an increasing amount of supply, he said.
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