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Geopolitical tensions in the Middle East are reinforcing the importance of energy security and drawing renewed attention to Canada’s vast hydrocarbon reserves, says Jeff Bradacs, co-head of equity strategies and head of portfolio management and trading at Picton Investments.
Speaking on the Soundbites podcast this week, Bradacs said that while commodity prices remain the primary driver of energy stocks, Canada’s long-life oilsands assets, improving export capacity and disciplined producers create what he views as a compelling long-term investment opportunity.
“The recent geopolitical events are a reminder for investors that the world remains highly dependent on hydrocarbons,” he said. “And for Canada, it also highlights one of our greatest strengths. We’re one of the largest hydrocarbon resource bases in the world, measured in decades of reserves.”
Bradacs said Canada’s status as a stable jurisdiction is particularly attractive given the current geopolitical backdrop. He added that energy companies have learned from past mistakes to become “some of the most disciplined allocators of capital” globally.
While he acknowledged that a longstanding discount on Canadian energy has not entirely disappeared, improved market access and export capacity have helped narrow it.
“In the last few years, we’ve had TMX on the oil side. That’s helped narrow a bit of the heavy discount on our crude. And more recently, we’ve had the LNG exports, which helped narrow that gap on some of the gas molecules,” he said.
Bradacs cautioned investors against relying solely on near-term valuation metrics when assessing energy companies. Two firms may trade at similar cash-flow multiples, he said, but the quality of their underlying assets can differ dramatically. He contrasted many U.S. shale producers, which face annual production declines of roughly 30%, with Canadian oilsands operators whose long-life, low-decline assets can generate substantial free cash flow over time.
“I think that’s one of the underappreciated advantages in Canada. We don’t have those steep decline curves,” he said.
He favours companies with either long-life resource bases or the ability to move Canadian energy products into higher-priced global markets. He cited oilsands producers Suncor Energy and Cenovus Energy, whose low-decline assets can generate free cash flow for decades, as well as AltaGas, which profits by exporting propane from Canada to higher-value markets in Asia.
Bradacs said energy and other resource-related investments deserve consideration not only as return-generating assets but also as portfolio diversifiers that can help protect against inflation shocks.
“We’re not in that period of low persistent inflation which we had for 20 years. And when you have inflation in a portfolio, one of the hedges against that is having some resources,” he said.
He said Canada’s large reserve base and stable operating environment continue to support the investment case for the sector.
“Given that we have some of the largest reserves in the world, in a secure and stable jurisdiction, Canada offers exposure to some attractive opportunities in the energy space.”
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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.