Chicken Little is a famous storybook character. He (or she) had an acorn drop on his head and concluded the sky was falling. As he rushed to tell the king, he ran through the countryside yelling “the sky is falling. The sky is falling.” Along the way he collected other like-minded fowl, all yelling, “The sky is falling!” But the sky never fell, it was just an acorn.
In the shadow of our recent election I thought I would reflect on climate change and its impact on our investment climate. Recently “climate change” has evolved to become “climate emergency” and “climate crisis” as politicians amp up the language to elicit greater panic and more votes.
Environmentalists often seemingly promote anti-environmental practices. For instance, protesting pipelines forces oil onto trains, and banning GMOs and glyphosate would force re-adoption of tillage practices.
I consider myself a rational environmentalist, doing little things in my daily life. I have refused plastic bags at the check-out counter, and my wife purchased reusable grocery bags many years ago. We transitioned from plastic to re-usable water bottles a few years back. In my agricultural business, I saved farmers countless dollars and the environmental impact of many fungicide and insecticide sprays. This past year, when a crop consultant recommended both a fungicide and a desiccant on a customer’s canola, I suggested not. The farmer followed my suggestion, saving about $50 per acre and yielding almost 70 bushels with hardly a plant infected with sclerotinia. What is good for our pocketbooks is frequently good for the environment.
The unnecessary panic and stress being created in this area is dismaying. As with investing, poor decisions are made in a state of panic. B.C. forest fires are an example of “fear” marketing. Climate change experts predict the situation will get significantly worse if climate change continues. While 2017 and 2018 had devastating levels of fires guess what happened in 2019? Nothing. In 2019, B.C. forest acreage consumed by fire was 1.6 of what was consumed in 2018.
From about 2005 to 2008 the world was in the grips of a different oil-related panic. At that time the world was running out of oil with the fear being that we would no longer be able to travel as accustomed. Oil soared to $150 per barrel. I sold my oil stocks at the time, not believing the reports.
The vilification of the Canadian oil and gas industry is creating investment opportunities. Since 2013 foreign investment in Canada has declined by about 50 per cent, while Canadian investment outside of Canada has increased about 70 per cent. It seems that neither Canadians nor foreigners wish to invest in Canada, with much of that attributable to oil.
The investing world ebbs and flows with sentiment. Today’s sentiment towards oil is as extreme as 2008 but in the opposite direction. As a rational environmentalist and a value investor, I have no issue investing in companies that produce products necessary for a modern economy and responsible for a significant part of our quality of life, when they represent great value. Successful investing entails going against the grain.
Oil and gas is Canada’s largest export industry with oil sands representing 96 per cent of oil reserves. Greenhouse gas emissions from oil sands have fallen 28 per cent since 2000. Many oil companies are valued with unprecedented free cash flow yields. For example, Imperial, Suncor and Canadian Natural Resources have free cash flow yields of over nine per cent, while some smaller exploration and production companies like Crescent Point and Whitecap are even higher at about 14 per cent. The oilsands are long-life assets that don’t require perpetual drilling like U.S. shale. (Disclosure: I own shares and/or have sold puts on all of these companies.)
Doomsayers are always wrong. The sky is not falling and the world will not end in a dozen years. There is no need to bury your money in your mattress. I will stay the course and invest for a world that continues to progress in positive ways.