Hello and welcome to The Download. I'm your host, Dave Richardson, and we are joined by one of our favorites— I admit, we have biases here on the podcast— and that would be Sarah Neilson, who is the co-head of North American equities at RBC Global Asset Management. And part of my bias— you might even notice this with our guest list— I have a daughter named Sarah so we have a lot of Sarah guests on here. And she also works at RBC too. So she's just crushing it, just like all the Sarahs at RBC and RBC Global Asset Management. Thanks for coming back. I know you're super busy and it's always great to have you here. You had an interesting experience last week and it's around a topic that we've covered quite a bit over the last year and certainly what's happening around the world. Whether we're talking about technology, artificial intelligence, about the war in Iran, whether we're just talking about economic growth in general, energy is key. Energy is always a hot topic. And you had the opportunity to go out to the Calgary Stampede. Is that a place where you've been before?

I've been a few times and it's a really interesting time. It's obviously built around the rodeo and lots of fun in the city. But also, business people, companies, investors, and politicians come to town to talk business, see what's up in the industry. And it's a really relaxed, good network feel. So, it was a great time.

Yeah, doing business in a uniquely Canadian way for a week. So, a few pancakes and probably a couple of pops. And some good conversation. So, Sarah, we had Scott Lizakowski on a couple of weeks ago and Scott's a numbers guy— I know you're a numbers person too— but he was talking just about cash flow and getting into the nitty-gritty about some of the positives around the investment opportunity in the energy sector in Canada. But you walked away with an impression having been there just around the momentum and the feeling in the business. And I really wanted to get your sense of what you experienced, what those people both from the political perspective and obviously from a business perspective were saying about their industry and the direction they're headed.

Yeah, exactly. One CEO described it to me as he felt a buzz he hasn't felt in years when he was out there. And that was from a utility company, not a pure-play energy company. So we had utility companies, energy companies, power companies, even industrial companies, and they all feel this sense of optimism and alignment with the political scene in Canada in a way they haven't for a long time. So you really felt that that was really focal point in a lot of our conversations. We met with mostly energy companies, about 20 CEOs while I was out there, and they really gave us a sense for what they're spending their time thinking about. And as you touched on, there's been a lot of announcements happening around the country. Advancing resources and support for development in all kinds of parts of the country, which is a really nice shift that we haven't seen in quite a few years. And so our discussions were a lot around some of these new policy changes and support for infrastructure, and both on the oil side, natural gas side, and we haven't seen that in a long time. And so what does that do? I know we've talked in previous occasions, you look at the Canadian energy sector, it sits way up north in Canada with pipelines headed south, mostly, some going east and west, but traditionally bottlenecked from any kind of development. And historically, if something breaks, we have pricing issues. So seeing more infrastructure development really takes some of that bottleneck risk off the table. And I think that was some of the somewhat cautiously positive momentum we see. A lot of this is early days in discussion, and that was one thing that was cautioned too. So I think we're seeing this momentum, but a lot of negotiation still has to happen between both federal and provincial governments, as well as the producers and the builders of all of this infrastructure.

In a lot of ways, Canadian energy has faced a Strait of Hormuz for its entire existence. A lot of it's based in Alberta, Saskatchewan, Northwest Territories, mostly Western Canada. But I think the question, as we've talked about the last time you were on and we talked about with Scott and some of the other guests, about the idea that what's actually happening over in the Strait of Hormuz has created a window of opportunity for Canadian energy. Not everybody is a huge supporter of Canadian energy. There's proponents, there's detractors for a lot of different reasons. So we're not going to spend a lot of time on the politics around it other than the decisions that are being made by different regulators and politicians and governments, but we are going to talk about the idea that what's happening in the Middle East right now and with the abundance of the resources that we have— and it's not just oil and gas, it's a number of different things, hydroelectric, our capability in nuclear, which we've talked about— that Canada is a pretty safe and stable place. A lot of stable banker-type people like us. So it's not a bad place to rely on if you need that energy. With the evolution of technology— we know that the need for energy is not going away— so the optimism is really based on that, is it not? That there's this opportunity and there may be a way for us to come to an agreement on how we get this to market.

I think you're exactly right. The conflict in the Middle East has highlighted that need. Many countries don't have vast resources in the ground. Canada's got decades of oil and natural gas, and we know where it is, unlike some other jurisdictions where they're still exploring and they still have to prove that it's there. We know it's there. And it's there for many, many years in the future, so we're safe. We're highly regulated— maybe too highly, and we're working on that— but it's a good jurisdiction for other countries to lean on to import our energy. And they can count on us. And so we've seen that already start with the LNG Canada plant that started up last year, and it's been a big success. And we've seen support from the government and proponents, and even Shell made a big investment and bought company in Canada recently, another company. And so leading us to believe we'll see more LNG development and exports. And we've seen some of the other foreign companies and countries come in and really take a look. So I think that the discussions, the progress we've seen with advancing policy understanding and frameworks is opening the world's eyes to what Canada really has. And can really create an opportunity for the companies that already exist today.

So you take those pieces again that the world needs Canadian energy, that we do a relatively good job in terms of the responsibility, in terms of the way we manage those resources and think about getting those resources to market— and we'll spend a little bit more time on that as we move through the discussion— and we've got this policy shift where you're going to start to get some opportunities to have different ways of getting the product to market, and not just to the US but to Asia and Europe, etc. How does your experience there, the mood, these opportunities, how does that come together in terms of the way that you change or shift the portfolio that you're managing, which could be a bucket of Canadian stocks or a bucket of North American stocks?

Yeah, it's a great question. Now, it's great to talk about it, but some of the large infrastructure pipelines that are being contemplated won't be finished till 2032, 2034. And so these are long-dated growth projects, if at all they happen. And so now the conversations happen between us and management teams and looking at the numbers and understanding, what are the investment rationale for this? It's not «grow, baby, grow» by any means. Companies have been understanding it's a discipline now. We want to see returns to shareholders, and they've done that through increasing dividends, increasing share buybacks. I don't think that goes away in place of growth. Because there's maybe a positive slant there. There's still this discipline on investment, and we will continue to make sure that investments are done with that return on capital being front and center, not just getting some growth done. But these long-dated, low-decline products and processes that we have in Canada and some of the resources we have lend themselves to free cash flow generation for decades. So those investments make a lot of sense. And we own companies in our portfolios that have access to those that haven't been able to really get value for them. So maybe we can start to recognize that. But an area that I really like now that is maybe not going to wait a decade to recognize that value is the infrastructure companies. Midstream, we call it. They move the natural gas around the province and clean it up and take its pieces and ship it to where it's highly demanded, either export or down into the south. And those companies will start to benefit incrementally earlier. Now they've already got great growth runways without some of this unlocking, but as we see more infrastructure and policy unlocking, just even small amounts of development, these companies will extend those growth runways. So while the valuations for some of them are a little elevated today because they pay nice dividends and they have attractive total return, these advancements we're seeing in Canada really underpin those valuations and help people see, oh wow, this can continue not just 2 years, this is a 5, 10-year growth window. And they're utility-like cash flows sometimes in the sense that they're not going to go away because oil prices go down. If oil prices fall in half, you're still moving the oil and gas prices too. You're still moving it because you can't turn it off in a day.

But when you talk about valuations, though, we're not talking about the kind of valuations you see on some of these technology companies or companies that are in and around artificial intelligence. There are P/E ratios, and these are free cash flow numbers that are much different than those businesses. So it’s elevated, but still off what are typically fairly low numbers.

Very low relative to all these high-flying industries for sure. These are boring type industries, but they grow at 5% a year. Their dividends grow at 4 to 5% a year. And that's a good total return. Valuations, in P/E or more EV, enterprise value to EBITDA they're 12 times maybe. It's not high like you would see for a technology company, just a little higher than historical. But my argument is some of it's warranted because the growth runway is there. So they can execute and they have the capital and their leverage is lower than it has been in previous times we've gone through these growth windows. So if they can stay disciplined and find these high return projects, they're really good investments.

So, if you look at the change in policy and what's coming from an infrastructure perspective, is it the small companies that are going to benefit or is it primarily going to be the larger companies or it's everything?

It's both. The whole value chain will benefit because there's just more activity, more things to move. And some of the companies that we look at, they touch a hydrocarbon many times on its movement from the well to the end user and charge a little bit along the way. And that compounds to their bottom line and to the shareholders. And that's not usually a big company, that's a smaller company intra-basin. So it's a lot of different aspects. And so I think that there's a lot of opportunity there. And in power in Canada too. That's one thing we didn't touch on.

Well shift to power in a second. Let's just talk about, from your experience— and you've been around the industry for a long time— is it safe to say that Canada does a particularly good job in terms of managing the extraction process and keeping emissions down? Is that a focus of these companies along with the growth? Or for those investors that are thinking just a little bit just beyond the pure profit, are we doing things the right way? Are we doing it in that Canadian way that we all hope we always nail? Because we like to think that we do it right here in Canada.

Yes. Historically, a very safe industry and very highly regulated in that sense. And from an emissions point of view, we have seen the emissions intensity fall. And increasingly companies are testing new ways of developing energy on the oil side that are lower intensity. So we may see the overall emissions grow as we grow the basin, but the intensity, which means the carbon per barrel produced, will go down likely because it is more efficient, some of these new processes. With time, technology efficiency and carbon efficiency is a focus. As well, on the natural gas side, we're one of the lowest carbon producers that exist globally. And that's something that our large gas producers talk about often, that's why our LNG exports are sought by external parties and European countries. It's low carbon, it's well regulated, and it moves to the West Coast through these pipelines and is exported. And it's a really good story. The Pathways is something that the oil sands companies themselves came up with, which is a plan to reduce the carbon emissions through carbon capture. A big ambition. It's taken some time and some iterations and some edits because things do once you get real costs in real-world situations, but they are committed to continue, or discussions are continuing to advance that. And my discussions last week saw them continuing to progress that. So that's sequestering some of the carbon they're emitting in their processes and putting it underground forever.

I don't want to belabor that point, or even on the growth side—there's a group of people that are «drill, baby, drill» and there's another group of people who don't use oil at all— but I think most people kind of sit in the middle. And when they think about it from an investment perspective— and by the way, there are lots of ways that you can invest without having energy, oil, gas in your portfolio, so those options are always available— but I think most people are in the middle. It's a transition. Natural gas is part of that transition. What we're doing from a hydroelectric perspective, nuclear perspective, this is all part of that transition. And Canada tends to be among the leaders in the world in terms of carving that path out to do it as best we can do it.

Yeah. And I will say one announcement I didn't touch on when I was in Calgary and very topical was that we've seen a large hyperscaler announce a data center investment in Western Canada. Meta has announced a $13 billion in Canadian dollars investment in Alberta and making a 1-gigawatt data center. That's the first of its kind in this new generation of data centers. And we've watched in the US so much growth in that sense. And the power companies there and the utilities have benefited from this kind of investment and expectations for massive growth in electricity demand. And seeing this first announcement in Alberta is really exciting. Why did they pick Alberta? It's an unregulated power market that has excess power today. That's something they like because they could build it fast and turn it on without having to also build additional power at the same pace. Will they build power in the future? That's the plan. They've announced that with a couple of partners that we’re also investors in. I think that might be the first of many we see announced in Alberta. It's colder. It has abundant natural gas, which we talked about, and a regulatory framework that's attractive and a political backdrop that's attracting capital deployment right now. So it's a nice progress to see.

Yeah, I know that you've started to hear about a lot of pushbacks on these data centers in different jurisdictions in the US, but a lot of that has to do with the idea that they're taking power off a grid that's already stressed. Whereas, as you say, here in Canada— I was actually talking to someone who's up in the politics of Manitoba— and it was the same thing. They've got excess power that they sell to the US, and this would be another way of using it. And then as you suggest, the other advantage we have— which is not often, an advantage for Canada other than our fantastic success as a hockey nation— is it's cold here a lot of the year. Even in July today in Toronto, it is not that warm. And that is actually a positive in terms of the day-to-day running of a data center.

Data centers need a lot of cooling. All that power means a lot of heat in all the servers, and they need cooling. And so if you build it in somewhere that's already got that benefit of being somewhat cooler. And actually water is a big concern with data centers and as it turns out, this design is going to require less water than most. They'll look for different cooling technologies. So I think it's a really good development to see and help some of the companies that we own and it will see more growth.

Interesting bit of trivia actually: Canada, just in terms of land, is smaller than the United States We're actually larger in total area because we have a lot more water.

Right.

I know you knew that. Just throwing it out there. It's so hard. I don't think people appreciate as they listen to the podcast. And hopefully you do. Please follow us where you download your podcasts and subscribe to us on YouTube so you can get to see Sarah with the great background we've got set up for her today. But it's hard because everyone I interview is so much smarter than me. It's almost impossible— only my mom thinks I stand up to all the incredible investment managers that we have on the podcast. So we talked about oil, natural gas, and then you start to talk about hydro. What are the opportunities there and how have you been taking advantage of that in the portfolio?

Well, hydro, in some cases, we own some utilities that have significant hydro assets all through North America. So those are amazing long-life assets that are kind of a gift that keeps on giving. Obviously water levels change, but over time it's a very consistent product. Another area that we talked about actually when we were in Calgary was nuclear— if I could touch on that. I thought that was really exciting. TC Energy did a teach-in on their nuclear footprint. And so, as you know, in Ontario here, we have a large nuclear fleet at Bruce Nuclear, and TC is an owner there and currently investing to refurbish and extend the life of this carbon-free energy. And it's been a significant driver of growth and investment and attractive returns. And they revealed that there's maybe potential for new growth in nuclear in that site. That's something that, again, still needs to be negotiated and figured out. But I think that that's a nice low-carbon way of adding more much-needed energy in the Ontario stack and it provides regulated returns and a growth profile for that company, as well as many industrial companies that are existing in some of our portfolios that will help build out on this major infrastructure development.

So you went into the Stampede with a particular weighting across your portfolios. Let's focus on the Canadian portfolios for the purpose of this question. So you had a weighting in Canadian energy and utilities and nuclear, all these areas. And then you come back from the Calgary Stampede. Where was your weighting coming in relative to where it normally would be? And then are you looking to increase that weighting or cut back based on your experience there?

I would say on some of the infrastructure and power, we increased a little bit post some of our meetings and some of the announcements we talked about because we do see this runway, like I said, of cash flows extending. On the energy piece, and specifically oil, that's bigger than just our meetings in Calgary, Dave. We've got a lot of uncertainty in the oil price that we're also trying to negotiate and understand, and that's been challenging to say the least. We're more on equal weight and making moves in some names that we think will have more benefit even if the prices fall a little bit. And I'll just touch on, if you look at energy stocks, they are about to report their Q2 earnings when oil prices in the US were on average $93 for that quarter. Canadian energy stocks in Canadian dollars recognize over $100 per barrel. The free cash that these companies are going to generate— because their costs are largely fixed, they don't flex up and down with the oil price— that flows to the bottom line. And so there'll be massive amounts of debt that's retired this quarter and shares bought back. So all accruing to shareholders largely. And so we find that really attractive. Now we are cautious that once we get this de-escalation in the Middle East, which will happen— maybe it's happened. Who knows? I find it really difficult— we will see some softness in oil prices and volatility, I think, for months to come as the market understands whether we'll have a supply dynamic that supports higher prices. But so that debt reduction that I expect we'll see with the Q2 reporting provides a better base for the Canadian energy companies to withstand the volatility. They have better business models, and then they can look ahead at continuing to return free cash to shareholders.

I was saying to Scott when we recorded with him a couple of weeks ago that I was out with some friends and they were talking about how well their energy stocks have done this year and had done actually best during the lead-up to the actual attack on February 28th, but then had held their value as the price of oil went up. Then the price had settled back 3 weeks ago into the high 60s again. And they're like, oh, I'm going to sell everything off. And as we talked about with Scott, that's not necessarily what you want to do because you want to think about these, as you said, as long-term holdings and companies that understand how they provide value to shareholders. And they're going to be a nice solid base in relative valuation terms, in an overall expensive market, inside of your portfolio.

Exactly. And you're right, on the rest of the market, most pockets seem quite stretched. So it's a nice base with this massive free cash flow potential. Even at the prices we see today. You mentioned 3 weeks ago, we saw that check back to $70, $60, they're still making free cash flow and they can make it right down to $55 WTI, plus or minus— not all the same. And so that's a nice place to be in the portfolio and I think can continue to support a decent position.

Excellent. Well, Sarah, that's a great discussion. Always love checking in on what you're thinking and what you're up to. Because you were just out in at the Stampede, we thought we'd focus on oil again. And it's a nice follow-up. If you just look back again, if you're subscribed and you're following, you'll see the episode with Scott Lysakowski from a couple of weeks ago, a really nice dovetail because he went into a little bit more of the math on what's going on, which is why we didn't repeat it. As we say, Sarah's— she's actually better at math than Scott Lysakowski. Don't tell Scott, he doesn't listen. But he'd actually like that. He's tired of his reputation as a numbers person. He thinks he has much more to share. I haven't seen it yet. But anyways, we get a catch up from both perspectives. And I think investors who listen to the podcast have a really good idea of why we have energy in a lot of the portfolios you run. There was a nice move in energy in the early part of the year in advance or early stages of the war when energy prices went higher. But they remain good holdings long term for a lot of reasons. And as you're managing the portfolio, you're making sure you're in the right parts of the energy market because it's a broad market to put the right mix together for clients in their portfolio.

That's right. There are different pockets and I sort of generalize across a lot of companies that exist in the energy ecosystem. We pick our spots. And we look at management teams and asset quality and constantly meeting with them to understand opportunities. And I think we've positioned the portfolios quite well on some of the big names, but then also looking for some opportunities of new development. We're hearing of almost 20 new companies being formed in Canada, looking for new opportunities across the vast energy ecosystem. And that's exciting. We haven't seen that kind of activity in a long time. So, keeping up with those and seeing where there's opportunities for our clients too is exciting.

Yeah, and I know you and the team are on it. I'd argue better than anyone. And again, we always appreciate you taking the time to spend some time with us here in Toronto when you're here. And hopefully we'll have you back really soon. Thanks, Sarah.

Thank you.