Canadians must think like investors in oil and gas: Don Pittis

There is lots of money to be made in oil and gas stocks.

In a world where most trading is short term, shares as volatile as those in the petroleum business can be cash cows for those who repeatedly get it right.

On Friday, oil prices and petroleum stocks rose sharply after what appeared to be a missile strike on an Iranian tanker. Historically, Middle East conflicts have been good for the price of oil and for the stocks of non-Middle-Eastern producers, at least in the short term. 

But as Koch Industries and the Norweigian pension fund unload shares in Canadian oil properties, it is fair to ask whether they know something the rest of us don't.

If you are saving for retirement with a 30-year buy-and-hold strategy, should you be investing in oil and gas? The question is important even for those Canadians who don't have their own portfolio of stocks to manage, because as taxpayers that is what the governments are doing with your money.

Displacing 'OPEC dictator oil'

As part of his recent guest appearance in the national election campaign, Alberta Premier Jason Kenney has been touting the advantages for Canada of fossil fuel extraction. And as one of Canada's most articulate political salesmen, he made a strong case, including during last week's interview on CBC Radio's The Current, that other provinces should support the industry.

"If they want to benefit from the resource wealth created in Alberta, then please help us to get that to global markets, get a fair price for it and displace OPEC dictator oil, both in Eastern Canada and around the world," he told guest host Kathleen Petty.

But as he championed the fossil fuel sector Kenney appeared to be discounting a powerful new movement that has declared fossil fuels and the carbon they produce Public Enemy No. 1, dismissing youthful protesters as wild-eyed political radicals. 

"There were communist hammer-and-sickle flags out there — I wouldn't go to a rally with a hammer-and-sickle flag any more than I would to one with a swastika, quite frankly," said Kenny.

While mentioning your opponents in the same breath as communists and Nazis may be good politics that will appeal to the conservative-minded and those whose livelihood depends on the oil industry, it may not be good investment advice.

Plenty of thoughtful conservative voices, including the editors of the Economist magazine, Bank of England governor Mark Carney and corporate leaders have warned that long-term investors in fossil fuels must beware. If pressure to cut carbon output continues as sea levels rise, crops fail and more species go extinct, they have warned, oil, natural gas and other fossil fuels must be left in the ground.

Many conservative economists have supported the carbon pricing that Kenney has adamantly opposed.

As an investor it does not strictly matter if you believe in the forces that will make your portfolio rise or fall. But for your self-interest, you simply cannot ignore them.

And many independent observers say it is very likely that the fossil fuel industry's days are numbered. The debate is mostly how long it's got.

Mark Kamstra, a finance professor at the Schulich School of Business, a specialist in risk, is skeptical that society will quickly abandon fossil energy.

"Everyone can see the future and, sure, it's not really bright for oil 50 years from now, or even maybe 30 years from now," said Kamstra.

He compares oil companies to Kodak, which faded away due to changing technology and new consumer needs. But he sees investment opportunities in the meantime. Rather than investing as much in exploration, oil and gas producers will return profits to shareholders resulting in higher dividends yields. Also, psychology can play a part.

Oil stock embarrassment

"You can't go to a party and boast about making money on oil stocks right now," jokes Kamstra.

As shareholders divest to demonstrate their disapproval, they may have the unintended effect of making fossil fuel share prices lower than returns would justify, something observed with so-called sin stocks such as tobacco and liquor companies.

But despite warnings of a climate emergency, the "extinction rebellion" and the student marches following the example of teenage climate champion Greta Thunberg, Kamstra believes the petroleum industry is simply too entrenched in economic life for the world to make a speedy pivot. 

"I just don't think people will be willing to make personal sacrifices. It's got to be win-win," said Kamstra.

Matthew Klippenstein, a chemical engineer with a long history in the clean-energy sector, sees a win-win for the Alberta oil and gas industry as the world moves to low carbon.

Kodak went bankrupt partly because it was terrified of undermining its own principal business that depended on film. But Klippenstein sees a way around that conundrum. 

Sophisticated players in the oil and gas sector including Suncor are already looking for ways to avoid the Kodak mistake, for example by installing high-speed electrical vehicle chargers in the company's Petro-Canada service stations.   

Klippenstein, who recently worked on an innovation report for Zen Clean Energy Solutions, told me last week that Alberta's high-tech energy sector should use its skills and wealth, for example, in the young but growing hydrogen sector, which David Layzell at Canadian Energy Systems Analysis Research says is already feasible. It's a low-carbon technology that will grow as oil and gas gradually declines.

"Yes, [Alberta's] energy sector and infrastructure are for now fossil-focused," wrote Klippenstein in a recent tweet.  "But that's incidental, not intrinsic."

Like Kamstra, Klippenstein sees the demand for Canadian oil and gas continuing for decades. But the companies that survive and prosper will not be those that dig their heels in and refuse to change.

If the low-carbon revolution actually happens, the companies that will still be worth owning in 30 years and the places that will attract investment will be those now making the effort and the investment to find ways to adapt.

Follow Don on Twitter @don_pittis