What role can Canada play in providing global energy security? Energy Examined speaks with Eric Nuttall, an energy columnist with the National Post and an investment manager with Ninepoint Partners LP. Nuttall reflects on the role energy security played in Russia’s invasion of Ukraine, the impact on current energy markets, and what Canadian policy makers can learn from Europe’s energy woes. He concludes with an optimistic view of the role Canadian oil and gas producers can play as leaders in responsible natural resource development.
Transcript of Podcast
Leighton: Hello and welcome to another edition of the Energy Examined podcast, the podcast that discusses the issues facing Canada’s oil and natural gas sector, with the insiders in the know. I’m Leighton Klassen. Today, I’m joined by Eric Nuttall. He’s a partner and senior portfolio manager with Ninepoint Partners LP and regularly appears in the National Post writing about energy sector issues. Welcome to the show, Eric.
Eric: Good to be with you.
Leighton: First, tell us a little bit about yourself, what you do at Ninepoint and what has been driving you to write about and comment on the energy sector in the media?
Eric: Sure. Well, I do run an energy fund. It’s the Ninepoint Energy Fund, it’s the largest energy fund in Canada by approximately $1.65 billion. We also just launched an energy and cap fund this week to much success, and it’s such a great indicator for the high and still growing interest in the Canadian energy sector. I’ve been running the fund for 12-odd years.
I’ve been doing this profession for almost 20 years, so I’ve seen my fair share of cycles and it was the reason why when I was invited to write for the National Post on energy, it didn’t take too long to accept the position. I’ve got three young kids, so it takes a good four to eight hours every second weekend to write, but I thought it’d be a great platform to be able to disseminate a few key messages in terms of the importance of our sector to the Canadian economy.
I was born in Ottawa, lived in Toronto, I’m out to Calgary quite often, and the level of energy ignorance in Eastern Canada is profound. And so my hope — there’s a couple of reasons why — but my main goal is to educate seems a little formal, and I try to be entertaining to convey the message that the world simply needs more Canadian energy, be it oil, be it natural gas, and that there’s a strong economic benefit not just to Alberta but to all of Canada what our sector does well.
Leighton: At our association CAPP, we certainly appreciate the efforts to get that message out, specifically out East because all of Canada needs to know this. Now we brought you on the show for your expertise on the interplay between international markets, events and policy. And obviously, the big story right now is Russia’s invasion of Ukraine. And I know you share with me, along with our listeners, the horror and the tragic loss of life that’s going on right now and hope that peace can be restored. But let’s just start there. Could you comment a little bit on the role energy played and continues to play in what’s going on there?
Eric: So, it’s an interesting moment in time. And I think it’s a teachable moment for energy policymakers, where very clearly energy sales, be it natural gas or oil is literally being weaponized. And you can quite clearly make the connection of say, the United States importing — or used to — 600,000 barrels per day. And that’s a wealth transfer of $65-odd million to Russia every single day. And I think people, politicians, the average man on the street has made the connection of, that’s $65 million being spent on cruise missiles, which are killing innocent kids.
And so, it’s a, it’s a teachable moment for policymakers all around the world to reassess the importance of energy security and at the same time, the ESG conversation, which we all get inundated with. For too long, the focus has really just been on the ‘e’. I’m sure we’ll get into it in the Canadian context in that we have the highest environmental standards than any jurisdiction in the world, but perhaps now is the time to place more focus on the ‘s’. And if we do that, I think there will be a realization that security of supply is important. From a social aspect, who do you want to be supplying the world with the necessary oil?
You and I, everybody listening to my voice, we’ll be consuming oil for the rest of our lifetimes. And so, I pose a very, very simple question to people listening. And that is, who do you want to be the supplier of that oil and indirectly benefit from it? Do you want it to be Canada? We produce the most ethical barrel in the world, we have the highest environmental standards of anyone in the world, no other jurisdiction on the planet would hold up the construction of a major pipeline on account of the migratory pattern of the common hummingbird. And so, do you want that necessary barrel — because it’s going to come — where do you want it from? Do you want it from Canada? Or do you want it from Russia? That’s literally at this moment killing innocent kids.
Leighton: Now the situation between Ukraine and Russia is obviously evolving every day. With the USA now banning oil imports from Russia, what does that mean for Canada and the rest of the world?
Eric: It’s a very complicated question because you don’t know of the approximate 4.6 to 5 million barrels of Russian exports. I think we can safely say their barrels are politically unpalatable now. And so how replaceable are they? And what will be the physical impact on the market?
We know that inventories will be, are at a multi-year low and we haven’t seen the impact of the Russia-Ukraine situation yet. It’s thought that China will step up some buying from them. And yet the impact could be several million barrels, which is frankly irreplaceable.
We just had talks with Iran and the US deal have seemed to hit a significant impasse. Venezuela is a rounding error. You mentioned lifting embargoes, you’re talking about, maybe a couple of hundred thousand barrels per day. Anything beyond that is part of the investment and one two years at least.
Leighton: We’ve seen oil well over $100 for I want to say, a number of weeks, if not a couple of months now. What effect is, back to the USA banning oil from Russia, what effect is that going to continue to have on the high price of oil? And then also we’re seeing high price–and this might be a double-barrel question–but also the high price of gas at the pumps.
Eric: So, we know in Ontario at least about fifty-five cents is taxes and we’re paying, about $1.90 a litre. So, let’s rewind. Where was oil prior to the Ukraine-Russia situation? We were roughly $90 and we were rising because inventories were falling and they were falling because demand was normalizing and supply growth was constrained for financial reasons, labour reasons, shortages of tubular etc. And so, I believe at that time, the price of oil was mispriced by about 10 dollars, so fair value is somewhere around 100, 105. With oil today at about 108, we’re only talking about a very modest risk premium in the oil price and my belief is we’re heading materially higher because of the structural constraints on meeting demand growth.
How does the United States replace 600,000 barrels a day of loss exports plus products, (which we should mention as well as that gets forgotten). I don’t know if we can replace three million barrels per day. In fact, we know that we cannot. I’ve seen some estimates, you then need to enter into a period where oil price itself acts as a demand destroying mechanism, which was always the thesis that I’ve written about in the Financial Post and op-eds.
So, if you can’t grow supply and yet demand is growing, inventories fall and they keep falling and you can’t have inventories continuing to fall at the velocity that they are. And so, ultimately the market needs to send a signal to kill demand. And that’s why we’re trying to work in terms of what exactly that price is. The macro backdrop for oil is likely the strongest in history right now. And there’s never been a period of time where you’ve got OPEC’s spare capacity exhaustion coming in the next several months, you have constraints, labour, tubular, financial on US shale, so you lack short-cycle supply.
Long cycle is, at best, flat. You’ve got a demand surge as travel restrictions ease, globally people want to travel. And so, it’s a very incredibly tight market.
Leighton: Now you wrote an article recently in the Financial Post about what Canadian policymakers can learn from the many energy issues Europe is having. Let’s start with what motivated you to write about this and then we’ll get into what’s actually happened there in the last several years.
Eric: There’s two reasons why, and it centres around a theme of energy ignorance, which I have written about a couple of times, and I define that as the lack of knowledge of how oil is used. And the second part is the likely timeline for alternatives to displace its usage. If you were to ask the average neophyte, the average guy in Canada, ‘well, how is oil used?’ They’re going to say, ‘well, I’m not using my car, putting gas in is about 80-90 percent, we’re all driving large cars.’ And so, that energy ignorance has profound implications.
One, on energy stock valuations where, why would you place value on a barrel to be produced 10 years from now when we’re not going to be using the stuff? I say that tongue in cheek. For energy policymakers, it’s leading to, in my opinion at least to very, very bad decision-making, which is impairing the economic potential of Canada. Let’s just say our government may not be as strong of a champion as is possible.
And if you were to reflect globally, show me another country on this planet, that if they were blessed with the abundance of natural resources and energy that we are, that would shun it, that would create legislation to impair the growth potential, to potentially place caps on how much you can produce of it. This sector is going to be capped, many companies are cash taxable next year with the cash taxability, the amount of money flowing not just to Alberta government, to the federal government to be spent on infrastructure for provinces through transfer payments to build hospitals and schools and roads.
And so, there’s two reasons why I’m attacking this issue. One is as a Canadian, it saddens me. I’ve got three kids. I do not want them paying the debt of COVID, which they will be. Now if I can lessen their burden by helping in this very, very small way, shape energy policy to take in all-of-the-above approach. Yes, we’re decarbonizing. Yes, we’re lowering emissions, et cetera. But the world needs oil and it’s going to need oil for the rest of our lifetimes. And so, why would we voluntarily cede market share to a Russia, to an Iran, to a Saudi when we can produce it in a higher standard from an E and S and G than them? To me, that is idiocy.
And then as an energy investor, why are energy stocks trading at a fourth to a fifth in some cases of where they used to trade five, 10 years ago? It’s because at the end of the day there exists this belief that ‘well, geez, there’s no value for long-dated reserves. So, I’m not going to pay for three years of cash flow per company because that’s like this burning twilight industry.’ Of course, and again, I very much say that tongue in cheek.
So, it’s dual-pronged. One, just as a Canadian, it saddens me that we’re stymying our potential. And again, I’m an Ontarian. I know the economic benefit that I get from people working their butts off in the field and in Grande Prairie where it’s minus 50 [degrees Celsius] out. The average guy does not.
At the same time, and then as an investor, so one of the largest owners of energy stocks in Canada, the low-hanging fruit for me to make my clients money is not counting on a rising oil price, which I think is going to happen. But on helping people see that stocks are mispriced because where — the average Canadian company is, this stuff blows me away still, every day, at the current oil price, the average Canadian company could buy back all of their shares outstanding and pay off all of their debt with just 3.3 years of free cash flow. And so, there’s no other stock that I can find, that I can create, to show just how profoundly mispriced energy stocks are. So, if I can in one very small way help influence the viewpoint that there is extreme value on long-dated reserves, which we’re blessed with as a country and as a sector, then that will hopefully lead to people placing value on it.
Leighton: You have very, very good points raised and very good questions raised as well. You know, it’s interesting because some would say, ‘well, you know, we need to go to renewable energy and that’s where we’re going.’ But the next question I want to ask is, you know, some jurisdictions have done that in Europe. Can you talk about what that’s done for them? You know, maybe in the United Kingdom, for example, in its reliance on wind power.
Eric: Again, I want to be polite. So, governments, government policymakers have good intentions, government policy, generally speaking, there’s good intentions. So that’s on one side. And then on the other side is our energy reality and ultimately, every politician has to deal with reality eventually. And so, when we look at electrification, we’re going to lean on renewables without redundancy. So, imagine we can’t build enough batteries for backup power for every country, especially in Canada, where if we don’t have power, then we freeze to death. If the wind’s not blowing and the sun’s not shining.
And so ultimately, there will be a realization that natural gas will be baseload for a long, long, long time. When we look at countries like the UK that were counting on wind power and there were some other things, it leads to us firing on coal plants. There are countries in Europe, prematurely abandoning gas fields and so you’ve got record gas prices in Europe. They’re paying, I’ve lost track now, but $600 per barrel equivalent for the gas, it’s just laughable. So, what are they, what do they get for it? They get energy poverty.
So, as a country that’s blessed with an abundance of natural resources produced in the most ethical and cleanest standards possible, my hope is this realization that the world needs energy. All of it. The world’s population is going to grow by two billion people between now and 2050, and it’s not occurring in Canada. It’s not occurring in the U.S. It’s not occurring in Japan. It’s occurring in low living standard areas: the Middle East and Africa, where they consume five barrels of oil a year [per person]. We consume 20 because we have a lifestyle that we take for granted every single day. I certainly know my kids do.
And so, as the world’s population is growing in those areas where there are low living standards and they’re rising, the energy intensity of population growth means the demand for oil grows for a long, long time. So again, it goes back to, let’s decarbonize. Let’s embrace renewables. I’m not with my money because there, are generally speaking horrendously awful businesses with government subsidies. But if we’re going to go there, fine, let’s go there.
But the demand for energy going forward is so tremendous that we need an all-of-the-above approach. We need to grow oil production. Demand for oil is going to grow in my guess, by 50 million barrels per year in the next 15 years, plus we have a base decline rate, let’s say three to four percent, three to four million barrels per day, then we need to make up for the declines. So, you got to have four to five million barrels of new productive capacity every year. I cannot tell you with a straight face where that is going to come from. So, the price environment is incredible. The cash taxes, the royalties being produced, the schools, and the hospitals that that can all finance. It’s such an unbelievable opportunity. And so, for a policymaker, irrespective of political stripes, you do anything to impair that potential to me is just idiocy.
Leighton: Now back to the Canadian oil, what we can do, to your point, are there any specific policies or projects in the short-term we should be backing that would make a difference now?
Eric: Well, we can have our fantasy list, right? Certain bills that prevent the construction of a new pipeline beyond TMX, which should be shredded. TMX needs to get completed. I know cost overruns are laughable, but it’s still extremely economically viable, especially relative to $17.50 per barrel of transportation costs by rail.
So, I just don’t know if there’s a short-term fix. It’s been a long-term getting here, so there’s not something overnight. I can dream a dream and say that Biden’s going to pivot because he’s got a mid-term [election] in November. Keystone XL is the biggest no-brainer of all time. But maybe that’s wishful thinking. I hope not. So, I can’t identify anything other than repairing the damage that’s been created by certain governments talking about royalty reviews, legislation that’s been passed a couple of years ago that stymies our ability as an industry to grow, which has led to a time of investor exodus, which has been frustrating multiples. There’s a long series of things.
But if I was in the seat, if I was elected for a two-week time period, what I would do is to try to eliminate legislation that’s been passed recently, as step number one. And step number two, a certain minister travelled down south and quite effectively to deliver a message and that is, ‘why would you go to Iran and why would you go to Venezuela? Why would go to them for more barrels, when you have a trusted neighbour to the north that produces it in the most ethical way possible is going to use the revenue for hospitals and not for cruise missiles?’
Leighton: Good point. Now, the U.S. is where we export to. I do want to know, you know, what do you think? Why is that? And then, you know, you did mention in your recent article in the National Post that we need to diversify markets, which I know you’ve touched on. What can be done in terms of that?
Eric: Well, TMX expansion, for sure. So, I think there’s a strong demand globally for a Canadian barrel. To have a singular, customer for any business, whether it’s an energy business or an industrial business — anybody — you would be an idiot to have a single customer. And so, I just, broadly speaking, customer diversification, competitive tension for our barrels, having another area where, that should be able to compress differentials in the next two years below 10 bucks, I’m hopeful. It’s unbelievable and when you think about, this stat was true a few days ago, where the selling price for a Canadian barrel has literally never been higher. Last time we were here, we were above par. Now we’re at roughly 80 cents, so it’s a massive windfall. The cost structures are lean, and so you think about a couple of extra dollars per barrel on differential. It’s not irrelevant from a netback and a cash flow — free cash flow — and dividend and buyback potential.
Leighton: And you mentioned earlier about Canada’s environmental and ethical record, it’s a message that my organization tries to get out there and promotes as well. You’re doing it as well, but you know, like does it give us a global competitive advantage in the markets?
Eric: Today, no, it absolutely doesn’t. I think it’s like one voice against a billion for now. That’s why I’m hopeful that — and you can see it. You can see the narrative being shaped and changing in terms of the acceptance of nuclear. You have countries that have shunned it, now they’re talking about potentially adopting it more.
You have certain prime ministers saying that we actually need to increase our domestic production in a certain North Sea as opposed to, we need to kill it for net-zero targets, etc. So, there is change happening and it excites me because the pendulum swung way too far in my opinion. And so, there’s a real opportunity here to be able to reshape the narrative where it was, there was this zealousness to a certain conversation that I think if you can tame that down and the pendulum returns a little to the middle, it’s not like we don’t need to do some things. But perhaps the pace of doing it needs to be re-evaluated when suddenly energy security matters. It didn’t matter five years ago. It did, but not to the people making the decisions. Now it does.
And so, it’s a real, I think it’s an opportunity for people to have access to policymakers that we need to shout it from the rooftops right now. This is one heck of an opportunity to be able to re-evaluate what energy policy should be. There are energy realities that we need to contend with. We need an all-of-the-above approach. But part of the conversation that wasn’t being had, and that’s the role of oil, Canadian oil, of Canadian natural gas going forward.
Leighton: To cap things off where we move forward and if there is optimism and like you said, I think it’s fair to say some cautious optimism, would we say that?
Eric: Oh, I’m not cautious. I’m very optimistic. I’m so excited about the outlook for oil. The long-term outlook for gas as it increasingly becomes a global commodity. And the ability, now I’m not talking out of my book here but as a fund manager, the ability to make money for my clients through buying producers of a product that is in demand, is in growing demand and whose demand will grow for the next at least 10, 15 years at which time, it will slowly moderate and yet we produce it in the best way, manner.
But I can buy those businesses and privatize and become debt-free with just three point three years of free cash flow. Yet they’re sitting on an abundance of reserves, which is being ascribed zero value because the average guy on the street is energy ignorant. You can feel that slowly changing. It’s a slow process, but it’s going to change. So now I’m really positive about the outlook for our industry. There are things that could be better as there always is. But I’m optimistic. You have to be. I’m optimistic that things are good now and they’ll continue to get better.
Leighton: OK, great. Well, I think we could all use some optimism these days. So, thank you very much for your insights, Eric. We really appreciate it. Thanks for being on the show.
Eric: Happy to be with you.
Leighton: Eric Nuttall is a partner and senior portfolio manager with Ninepoint Partners LP. Stay tuned for our next Energy Examined podcast. And if you like this one, please share it with a friend and make sure you subscribe on whatever podcast you have. For more stories and interviews on Canada’s energy industry, check out our website, context.capp.ca. See you next time! Thanks.