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Ruth Saldanha: Last week, the failure of the OPEC+ coalition to reach an agreement on production cuts sent oil prices into a tailspin, with West Texas Intermediate crude dropping into the $20 range, the biggest single day loss in almost 20 years. The roof sparked pandemonium in the markets with the TSX losing more than 10% in one day. What does this mean for Canada? And what does it mean for Canadian oil? Nicolas Piquard, Portfolio Manager at Horizons ETFs is here today to talk about this. Nick, thank you so much for being with us today.
Nicolas Piquard: Thanks for having me.
Saldanha: First up, how long do you think this impasse is likely to last?
Piquard: I think it might last a little bit of time here. We have both a supply shock and a demand shock for oil. And that doesn't usually happen together. So, the demand shock happened earlier with the coronavirus. China is a big consumer of oil. And of course, because of the quarantining, their consumption has gone down and now it's affecting the rest of the world. So, we really see kind of a longer impact demand shock than people expected at first.
So, not only you would expect the suppliers to cut down on production, and now we have the opposite happening, with Saudi Arabia and Russia not agreeing on production cuts, and actually increasing production versus reducing production. So, we have to resolve both the demand side and the supply side as opposed to just one side.
Saldanha: Historically, Canadian crude has always traded at a discount to global prices. With global prices falling now, how do you see this discount playing out over the short to medium term?
Piquard: Well, I think, the discount has, as always, going to be around for a long time until we can fix the pipeline issues that we have in Canada. But I don't see it becoming much bigger in this environment. I think that production is going to cut down, both in the U.S. and Canada. And I think you'll see that discount kind of staying pretty stable.
Saldanha: You mentioned pipelines. Now, one of Canada's major problems has been both the pipelines and social unrest in the oil sector. Do you see this continuing to be a problem over the medium to long term?
Piquard: I think I do. I mean, I think, environmental concerns and social and governance concerns, they've become such a big part of the conversation now that it's going to take some time for everyone to agree on the best way forward. And I think in the end, as a society, we're still going to be using fossil fuels over the long term. And so, we're going to have to find solutions. But I think that it's going to take some time.
Saldanha: How do you see all of these risks playing out, especially for the small exploration companies? There is some fear that some of the smaller players might actually get wiped out. Are you worried about the small to mid-cap space?
Piquard: I am a little bit worried about this small to mid-cap space. I mean, I think the biggest problem will be the ones that have more debt and more leverage. I think that what you want to do is, you want to make sure that whatever companies you're looking at, they have a pretty stable balance sheet, they can weather the storm for as long as it takes for oil prices to recover. Oil prices will recover. It's just a matter of time. It's just in the meantime, these companies have to survive. The small explorers actually have, I think, a bit of an advantage over the producers because generally they have less debt. And so, they might be able to cut expenses and keep going. But you have to worry about the ones who have borrowed heavily on big projects, and who aren't profitable at these prices.
Saldanha: So, where does all of this leave Canadian oil?
Piquard: I think, Canadian oil is trading very, very cheap. If you look at the S&P/TSX Capped Energy Index, it's down over 80% from its high. We're almost at levels that we were about 20 years ago. Right here, it has a pretty good dividend yield. I think if you're a long-term investor, it's not a bad place to look at investing.
Saldanha: Thank you so much for being with us today, Nick.
Piquard: Thank you.
Saldanha: For Morningstar, I'm Ruth Saldanha.
