In general, I view the broad Canadian energy market as one resembling a long-term short for a number of reasons. Canada’s exposure to oil represents a similar level today than the United States saw around 20 years ago, before technology stocks took off and the economy matured to a services and information led economy. I expect to see Canada’s energy sector broadly to continue to shrink in the coming decades, following a similar pattern to our Southern neighbors.
One of the key factors I believe will spur such a shift is a reduction in capital inflows into energy from institutional (and retail, to a lesser degree) investors. Companies like Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) that have large market capitalizations and broadly reflect such sentiment in the sector are among the most vulnerable should this long-term trend continue as I expect.
On a stock-specific level, Canadian Natural has some idiosyncratic risk investors ought to be aware of. The company does have Covid-related exposure. The company could see production slowdowns and operational shutdowns in some of its businesses if a serious second wave of the coronavirus does hit. Additionally, oil prices may not rebound as fast as many investors are thinking right now, and obvious detriment to stocks like CNR. This is reflected in a futures curve for oil that is pricing in US$50 WTI in 2027, as of the time of writing, I would encourage investors considering blue chip Canadian energy stocks right now to stay cautious and defensive in this sector for the foreseeable future.
Invest wisely, my friends.
