MARKET OUTLOOK:
The world has plunged into an energy crisis, created by the energy ignorance of policymakers and too many years of insufficient investment in new productive capacity. The result? A multi-year bull market that will last at least five to six years, resulting in an oil price high enough to both kill discretionary demand growth while allowing companies to pivot and start investing again in long-lead projects.
While fears of a recession cause some to be worried, we estimate that global GDP would have to reach roughly zero, something that has only happened three times in recent history (2020, 2009, 1982), for the oil market to just reach a state of balance. With Russian production to likely fall more meaningfully in the 2H’22 and OPEC to soon reach spare capacity exhaustion, we think oil will have a solid fundamental floor of around US$100 WTI and to test over US$150 WTI in the coming quarters.
At US$100 WTI, Canadian energy stocks are trading at 3.0x enterprise value to cash flow and a 24 per cent free cash flow yield. With nearly all companies committing to maintain low-to-no growth and instead return the majority of free cash flow back to investors, we have entered a golden era for egregiously high levels of dividends and share buybacks, which in my opinion will result in a re-rating in trading multiples back closer to historical averages of 6x-8x.