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This episode, Scott Lysakowski, Vice President & Senior Portfolio Manager, Head of Canadian Equities, Phillips, Hager & North Investment Management, shares his perspective on economic recovery and the price of oil. Scott also highlights the opportunities available to clients currently invested in energy. [6 minutes, 12 seconds] (Recorded June 9, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson. And I am joined once again by the Head of Canadian equities at Phillips, Hager & North Investment Management, Scott Lysakowski. Scott, welcome back.

Hey, Dave. How are you doing?

I'm good, thanks. How are things out in Vancouver today?

Beautiful. My background is a nice, sunny day. Springtime in Vancouver; I can't complain.

Well, one of the things that people are looking at, and one of the really interesting things going on in markets that I wanted to cover with you today— and it's timely, given what you've been up to over the last couple of days— is our energy markets and particularly the price of oil, which crossed 70 dollars yesterday; down a little bit today, but has been bouncing right around the 70 dollars mark. And I think if anyone had told me a year ago that oil would be at 70 dollars a barrel today, I would have told them I would have the same haircut that I had in university in the late 1980s, which was a mullet, which is what I'm carrying around today because we're under restrictions. But you'd probably say the same thing, right? You're surprised that the price is where it is? And I think even analysts today, even with it sitting at 70, are surprised by this number.

Yes, I think I'd be in the same camp as you, Dave. A year ago, we would have been just a few months off the negative oil prices that we saw and in the depths of the pandemic and lockdown, without a vaccine in the foreseeable future. So, if you would have said oil is going to be 70 dollars a year from then, I would have taken the under as well. The good news is, we're not alone. I was looking at a stat on Bloomberg this morning; of nineteen sell-side analysts who have a forecast for oil for this year, only one of nineteen has a forecast greater than 70. So, we're not the only ones who have been wrong on this. But I guess to put it in context, we've seen recovery take place across all parts of the economy. And oil is a key driver, a key barometer of the economic recovery. As we move through the recovery and things start to reopen, it's not surprising that we'd see demand recover, and as a result, prices also recover. We've been talking with a lot of oil and gas companies over the last several days at an industry conference. And one of the things that I think is quite different— you're always careful when you say it's different this time—, but you have a very robust oil price environment. Demand is recovering, but you're not seeing the same type of behavior from the producers. And that's in terms of bringing supply back on. A lot of producers have lived a fairly rough twelve months. Particularly in Canada, it's been a rough number of years. So, you're starting to see a lot of that discipline really hold. Producers have said over the last year or so they're not going to be growing production into this environment. Even as you have demand recovering and seeing that price response, that price signal is really either not enough today to bring producers to spend money and grow their production enough for them to make those decisions. So, they're sitting quite tight using the higher oil price to improve their business. Higher oil prices, they're generating a lot of cash flow. When you're generating a lot of cash flow and you're not spending it, that's actually a really good scenario for investors because the oil companies are going to pay down some debt, which a lot of them have quite a bit of. They're going to grow their dividends. They're going to buy back their stocks because they look pretty cheap. So, it's actually not a bad environment to be an investor in oil and gas stocks, despite the fact that the top line production is not going to grow.

Yes, that's one side of it. The higher energy prices, you say, mean more cash flow, dividends distributed to clients, better balance sheets, ultimately. But there's other people who are not as excited about the energy industry for a number of reasons, particularly climate change. And there was an interesting announcement that you shared with me out of Alberta today, which shows the evolution of the industry and where it's going on longer term. Why don't you share that with us?

That's right. There was an announcement this morning that a consortium of oil and gas producers, mostly oil sands producers, have joined in Canada to create a group to launch their path to net zero. These are the largest emissions emitters in the country and through a partnership with industry and government, and through investment and government policy, they are on a path to reduce their emissions to zero, which I think is quite an astounding feat just given the sheer magnitude of the amount of emissions they have. So that's actually helping them earn a bit of that social license, as we say, to continue on and keep their level of production the same. But by reducing their emissions, I think that would be also a net benefit for shareholders, as they earn their social license to produce both oil and cash flow today.

Yes, and we're seeing a lot of movement on that front. Maybe we'll get back to that in a future podcast. But Scott, really interesting, again, hearing your thoughts around what's going on in oil. And I look forward to speaking to you again soon.

Great. Thanks for having me, Dave.


Recorded June 9, 2021

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