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. |
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| 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. |
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| 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. |
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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/.
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