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Energized Yields with the Horizons Canadian Oil and Gas Equity Covered Call ETF

Is it boom time in Canada’s oil patch once again?

Is it boom time in Canada’s oil patch once again?

The Canadian Oil and Gas sector, as represented by the S&P/TSX Capped Energy Index, has seen a period of relatively steady growth over the past three years. In 2022 alone, energy-related Canadian-listed ETFs saw in-flows of $3.6 billion – 13% of total equity ETF in-flows for the year, representing a 19% increase in assets under management in the category.

With a strong home investment bias, Canadians have historically favoured investing in the domestic oil & gas industry. Representing nearly one-fifth of the entire capitalization of the S&P/TSX 60, the energy sector is a dominant part of Canada’s investment landscape.

Canada’s oil and gas industry has benefitted from an increased demand since the post-COVID-19 reopening and a growing need for additional sources of oil in the wake of sanctions on Russia. Outside of all-time highs achieved in 2022, as at March 31, 2023, the S&P/TSX Capped Energy Index is at its highest levels since September 18, 2014 – more than eight years ago.

Source: Bloomberg, as at March 31, 2023

The price per barrel (“ppb”) of the benchmark West Texas Intermediate (“WTI”) and Canada’s Western Crude Select (“WCS”) have slid and a larger pricing gulf has emerged between the two, since June 2022.  Similarly, the S&P/TSX Capped Energy Index has slid -16.31%, as at March 31, 2023, from its high on June 8, 2022.

Source: Bloomberg, as at March 31, 2023

Do current levels represent an attractive entry point for potential Canadian oil & gas investors?

There are potential short-term, mid-term and long-term factors that are worth assessing when considering exposure to the Canadian Oil & Gas sector right now:

 

Short-Term Seasonal Demand for Oil & Gas Peaks in Spring/Summer is Coming

As with many commodities, the seasonality of crude oil can result in periods of relative weakness and relative strength throughout the calendar year. In particular, the spring and summer months tend to correlate with stronger relative performance for crude oil futures.

During spring, prices typically begin to increase and gain forward momentum during March, and through to May, in anticipation of growing demand during the warmer months.

Summer is considered the peak demand season. From the start of June until the start of September, prices for crude oil tend to peak and historically trade at the highest levels of the year.

Mid-Term OPEC sees 2023 Boost with Chinese Demand Increasing

On April 2, 2023, the Organization of the Petroleum Exporting Countries (OPEC) producers announced they would cut output by more than 1 million barrels a day, starting in May, which resulted in a positive lift on global crude oil prices.

In a March 2023 report, OPEC+ raised its 2023 global oil demand growth forecast by 2.3% or 2.32 million barrels per day. The upward revision was in part due to greater conviction over a broader re-opening in China, following the relaxation of COVID-19 restrictions. OPEC+ also cited a tighter market, with reduced supply forecasts from Russia and other oil producers.

Long-Term Canadian Oil & Gas Companies are Healthy and Growing

After generating significant revenues during the oil price highs in 2022, analysts are noting that many companies within the Canadian oil and gas sector have secured a stronger financial position than in years past and are planning to continue to ramp up production. According to BMO, most large and mid-size producers are expected to be net-debt-free by the second half of 2023.

In addition, the Canadian Association of Petroleum Producers (CAPP) recently forecasted that investment in upstream oil and natural gas production will hit $40.0 billion in 2023, surpassing pre-COVID investment levels and representing an over 80% growth since the 2020 lows.

Canada’s Oil & Gas industry includes some of the country’s largest capitalization companies – including energy producers and pipelines – and has historically offered investors attractive income through dividend distributions.

Among sectors within the S&P/TSX Composite Index, the Canadian Oil & Gas industry, as represented by the S&P/TSX Capped Energy Index, has delivered among the highest dividend yields relative to other facets of the Canadian economy.

On a current trailing 12-month yield basis, the Canadian Oil & Gas sector, as represented by the S&P/TSX Capped Energy Index, has yielded 5.01%, as at March 31, 2023.

Source: Bloomberg, as at March 31, 2023

Over that same period, the Horizons Canadian Oil and Gas Equity Covered Call ETF (“ENCC”) – a covered call ETF that provides equal exposure to many of the same companies represented within the S&P/TSX Capped Energy Index – has a 12-month trailing yield of 14.29% as at March 31, 2023 compared to its benchmark, the Solactive Equal Weight Canada Oil & Gas Index (SOLCOGEW) for the same period.

Source: Bloomberg as at March 31, 2023, in CAD.

For income-focused investors, ENCC could offer a potential opportunity to not only gain exposure to Canada’s oil and gas sector but also add double-digit estimated annualized yields to their portfolios.

Based on its most recent distribution, ENCC’s estimated annualized yield is 14.62% as at March 31, 2023 – the highest among Horizons’ Covered Call suite of ETFs for the said period.

12-month trailing yield is the yield an investor would have received if they had held the ETF over the last twelve months stated as a percentage of the net asset value per unit on the last business day of the most recent month end.

Source: Bloomberg as at March 31, 2023, in CAD.

For investors seeking to invest in the oil & gas sector, whether to diversify their portfolio, gain exposure to Canadian energy stocks, or seek attractive yields, ENCC offers a strong value proposition for investors looking to gain exposure to the dividends offered by these companies while potentially generating an enhanced double-digit yield.

Estimated Annualized yield is an estimate of the annualized yield an investor would receive if the most recent distribution rate stayed the same for the next twelve months, stated as a percentage of the net asset value per unit on the date before the ex-dividend date of the current distribution.

Table 1. Standard Performance – March 31, 2023 (in CAD)

TICKER ETF/INDEX 1m 3m 6m UPDATE* YTD 1yr 3yr 5yr 10yr Since Inception Inception Date
ENCC Horizons Canadian Oil and Gas Equity Covered Call ETF -1.60% -3.48% 5.01% -0.12% -3.48% 2.20% 64.72% 7.26% -3.00% -4.29% 11-Apr-2011
SOLCOGEW INDEX Solactive Equal Weight Canada Oil & Gas Index -1.97% -4.00% 5.10% -0.22% -4.00% 3.08% 46.71% 8.93% 2.31% 2.45% 16-Sep-11
HXE Horizons S&P/TSX Capped Energy Index ETF -3.52% -4.30% 9.16% 2.21% -4.30% 7.23% 61.55% 8.94% 1.51% 16-Sep-2013
TTENAR INDEX S&P/TSX Capped Energy Total Return Index -3.50% -4.23% 9.32% 2.43% -4.23% 7.53% 61.99% 9.23% 2.32% 5.90% 22-May-2001

Source: Bloomberg as at March 31, 2023, in CAD.

The indicated ETF rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Additionally, index returns do not take into account management, operating or trading expenses that may be incurred in replicating the index. The rates of return above are not indicative of future returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. The indices are not directly investible. Only the returns for periods of one year or greater are annualized returns.


*Effective June 24, 2022, the investment objectives and strategies of the Horizons Canadian Large Cap Equity Covered Call ETF (“CNCC”) (formerly Horizons Enhanced Income Equity ETF (“HEX”)), Horizons Canadian Oil and Gas Equity Covered Call ETF (“ENCC”) (formerly Horizons Enhanced Income Energy ETF (“HEE”)), Horizons Equal Weight Canadian Bank Covered Call ETF (“BKCC”) (formerly Horizons Enhanced Income Financials ETF (“HEF”)), Horizons US Large Cap Equity Covered Call ETF (“USCC.U, USCC”) (formerly Horizons Enhanced Income US Equity (USD) ETF (“HEA.U, HEA”)), Horizons NASDAQ-100 Covered Call ETF (“QQCC”) (formerly Horizons Enhanced Income International Equity ETF (“HEJ”)), and the Horizons Gold Producer Equity Covered Call ETF (“GLCC”) (formerly Horizons Enhanced Income Gold Producers ETF (“HEP”)), were changed following receipt of the required unitholder and regulatory approvals, to seek to provide exposure to the ETFs’ underlying equity portfolios and to employ a dynamic covered call option writing program.  Previously, the ETFs sought exposure to an underlying equal-weight equity portfolio and generally wrote covered call options on 100% of portfolio securities. The new tickers began trading on the TSX on June 27, 2022. For more information, please refer to the disclosure documents of the ETFs on https://horizonsetfs.com/.

Commissions, management fees and expenses all may be associated with an investment in exchange traded products (the “Horizons Exchange Traded Products”) managed by Horizons ETFs Management (Canada) Inc. The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The payment of distributions, if any, is not guaranteed and may fluctuate at any time. The payment of distributions should not be confused with an Exchange Traded Fund’s (“ETF”) performance, rate of return, or yield. If distributions paid by the ETF are greater than the performance of the ETF, distributions paid may include a return of capital and an investor’s original investment will decrease. A return of capital is not taxable to the investor, but will generally reduce the adjusted cost base of the securities held for tax purposes. Distributions are paid as a result of capital gains realized by an ETF, and income and dividends earned by an ETF are taxable to the investor in the year they are paid. The investor’s adjusted cost base will be reduced by the amount of any returns of capital. If the investor’s adjusted cost base goes below zero, investors will realize capital gains equal to the amount below zero. Future distribution dates may be amended at any time. To recognize that these distributions have been allocated to investors for tax purposes the amounts of these distributions should be added to the adjusted cost base of the units held. The characterization of distributions, if any, for tax purposes, (such as dividends/other income/capital gains, etc.) will not be known for certain until after the ETF’s tax year-end. Therefore, investors will be informed of the tax characterization after year-end and not with each distribution if any. For tax purposes, these amounts will be reported annually by brokers on official tax statements. Please refer to the applicable ETF distribution policy in the prospectus for more information.

The financial instrument is not sponsored, promoted, sold, or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade name or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade name for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument.

Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward-looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

This communication is intended for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase exchange traded products (the “Horizons Exchange Traded Products”) managed by Horizons ETFs Management (Canada) Inc. and is not, and should not be construed as, investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor.

All comments, opinions and views expressed are generally based on information available as of the date of publication and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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