This is it folks. What you have all been waiting for these last few months with great anticipation and minor trepidation. Investment decisions on hold, life-changing real estate purchases pending, kids college funds in the balance. All waiting for the ethereal flight of fancy that is the annual Stormont Capital Fearless Forecast.
That’s right, not just any forecast. A FEARLESS one.
What does that mean pray-tell? Well, it means it is bold, brash, unconventional and will contain no less than six humdingers. Some of which have as much chance of occurring as a Trump-Pence 2024 ticket, but some, well they have an “Ivanka primaries Rubio” certainty to them. Still others have the inevitability of a Liberal majority government, which is one of my predictions for this year. Sorry if that offends you, it’s just what is coming, not necessarily what I prefer. Alberta, you have been warned. Plan accordingly.
On that ominous note, come on folks and step right up, step right up and let me tell you about the prognostications and guessifications that will amplify and electrify your portfolios. The stock picks and the macro directions that will set you on the path to eternal riches and immortal salvation.
The dreams, the visions, the words that will allow you to rise above the petty, malignant grind of your humdrum daily lives, secure in the knowledge that up is up, down is down and whatever is in the squishy middle is indeed edible.
And if I am wrong, so what! Right?
No one actually risks any money on these forecasts. Right? Like really. I hope not anyway…
And if I may say so myself, compared to prior years, this may be the Greatest Forecast Ever AssembledTM
Even better than last year where at this time I predicted the exact election result in the United States even if I whiffed on that whole global pandemic thing.
Follow along. If you dare.
Broad Themes
Politics and Stuff
Last year, civil unrest and the US Presidential election was my pick to be front and centre on the North American and global front for the course of the year.
This year will start off not so different as the lead-into and the aftermath of the chaotic US election season will give rise to protest and angst across the United States.
Trumpism, such as it is without the flame-fanning effect of Donald Trump’s presence on social media platforms such as Parler, Twitter, Facebook, YouTube, Tiktok, SnapChat, Instagram, Shopify, MySpace and the like, will not die easily, but die it will.
This will be the result of many factors, some of which are already in evidence today. The two biggest aside from the media ban are the Impeachment Two, Electric Boogaloo and the drying up of corporate support for Republicans who supported the challenging of the US election results.
The episode at the US Capitol, Donald Trump’s role in that, five years of near constant noise, grift, lying and chaos and the second impeachment has fractured the Republican party. Unlike others, I don’t think it is permanent and I see it being put back together but at this stage, no leader has yet emerged with the chops to pull off any rebuilding effort. Canada and Alberta watchers will observe the death-spasms of this iteration of the conservative movement in the United States with the wistful memories of similar schisms here with the PC/Reform/Bloc/CCRAP/CPC evolution and our very own PC/Wildrose/UCP implosion and resultant Humpty Dumptying.
It is entirely possible that a third party emerges in the US. I have seen calls for something called an America First movement, but there is no champion for that. Trump and his family are out. Ted Cruz is, well, Ted Cruz and Josh Hawley is permanently tainted.
Against this backdrop comes what will be, in my estimation, the single most boring US administration in memory.
Joe Biden’s mandate is clear. Manage through the rest of the pandemic, restore the economy, which is in much worse shape than anyone wants to talk about, rebuild the US brand internationally and create a sense of unity and common purpose around all the preceding. It is a tall task for a president who probably should be taking afternoon naps at this stage of his life, but it’s his moment and it sure hasn’t seemed too big for him yet.
Sure, there will be continued protest and conflict. It’s a big diverse country with many opposing viewpoints. But starved of oxygen, I don’t how Trumpism survives. Reality is I don’t believe that deep down anyone actually wants it to anyway – even the most ardent supporters. It’s just too damn exhausting.
Here in Canada, we are headed into silly season. That’s right, we are about to have (another) Federal election. Why oh why would we have an election during a pandemic you might ask? Well, mainly because the Liberals are sharks while the opposition is basically a couple of muppets with paper cuts flailing in the water. Riddle me this. If you are a minority government just starting to turn the tide against a global pandemic, do you seek a fresh mandate while the cash and vaccines are flowing out the door or do you wait until people are back to work and see what a mess the economy is, about the only issue the Conservatives can engage on. See how easy that was? Fearless forecast, Federal election. Trudeau/Liberal majority and Trudeau quits by year end and PM Freeland takes charge. You heard it here first.
While 2020 was expected to be a year of conflict globally, COVID largely tamed that unless you happened to live in Hong Kong.
2021 should see a return to and continuation of some regional tensions.
The Iran crisis, which has been ongoing for more than 40 years will continue to percolate. A roibust nuclear program is their goal and they will challenge Biden early. Based on his current security and military picks, he and his team are up for the challenge and should be able to defuse tensions unless Israel or Saudi Arabia get other ideas. Expect continued sanctions, occasional posturing and gradual cool-off.
China is the elephant in the room. Donald Trump’s unilateral and confusing approach to China did absolutely nothing to rein in this emerging superpower so it will be incumbent on Biden to build a much broader coalition to deflect China’s economic might and thwart some of its more malign ambitions in places like African and South America. I fear that we have lost the game in Hong Kong through inept response, but a proper series of checks and balances should restore the uneasy truce.
Russia is a big deal to the United States and Europe and a lesser deal to other countries around the world. While Russia has grand aspirations, the Putin-Trump gambit has run its course and Mother Russia will soon find itself increasingly hemmed in by a vengeful US government intent on exacting its pound of flesh for ongoing election interference and systems hacking, not to mention questionable loan guarantees to failed real estate developers. This will ultimately be bad news for Vlad the Impaler. It may not be in 2021 and he may not know it yet, but Putin is on his way out. You can only assassinate so many people.
Venezuela, which is in its 1219th year of economic stagnation seems destined to fall off the collective radar of powers that should want a peaceful resolution. This could create a vacuum that leads to conflict.
Another area to watch for conflict and humanitarian crises is Africa, whose countries comprise at least half of the top 10 humanitarian crises list for yet another year. Whether it’s starvation in the Democratic Republic of Congo, sectarian violence in Ethopia, Nigeria, Burkina Faso and South Sudan, 2021 promises to be a volatile year for the whole continent.
Energy and Environment
On the energy and environment front, 2021 is going to be a year of transition.
I know I said that last year, but, COVID.
This year the story is going to be ESG (Environmental Social and Governance) and renewable energy as the Biden administration rejoins the Paris Accord, rolls out its massively ambitions green infrastructure agenda and the world continues to ambitiously pursue a net zero by 2050 agenda.
It’s not going to be easy. There are massive societal shifts required to get there and the investment required is mind-boggling but for the first time in a while, the political will appears to have global momentum as opposed to inertia.
That’s not to say that there is no role for oil and gas in the energy transition. We are already seeing pockets of energy shortages pop up as pandemic ravaged capital programs continue to lag resulting in electricity outages in Japan and coal shortages in China. Like all just in time worlds, while globally we may be currently oversupplied, local crises (like a cold snap in Japan) and shortages can flare up and have long lasting impacts.
Stop spending here, create a shortage there and cause a mini-boom in yet another place. While the LTO train came to a screeching halt in 2020 and will require sustained price increases to overcome regulatory and financial hurdles to get back on a growth curve, the greatest irony in the past few years of pain is that Canada’s oilsands are poised for a big comeback in 2021 and 2022. As the global economies grow out of the pandemic induced slump, we will see oil supply get squeezed resulting in renewed interest in the Free Cash spewing Canadian oil patch and who knows, maybe even a pipeline or two. At the same time, localized shortages of LNG underscore that Canada’s massive LNG Canada project still makes sense even in a de-carbonizing world.
Finally, continued retirement of coal and nuclear generation facilities in the United States (2021 is going to be a BIG year for this) and abroad cannot be serviced by renewables alone which means that gas-fired generation will have to play a role. Or the lights go out.
So, a renewed focus on energy transition, ESG and a bull market for natural gas and Canadian Oil Sands. And you thought 2020 was a weird year!
Pretty heady (and wordy) stuff. Now on to prices.
Price of oil
Every year this is the flagship call. It is the Toronto Maple Leafs of forecasting. Always looks good to start and then completely craters as the year unfolds. Last year I took a COVID mulligan and adjusted my forecast early, then did great on the yearly average but missed the year-end price. This year I may reverse that. Who knows right?
So – my thoughts.
First off, oil and gas demand is expected to increase by about 2%-3%, as the pandemic recovery continues. US production is down from prior years and OPEC +++++ has cut significantly with Saudi Arabia taking the lion’s share of the pain, in order to support prices.
Inventories are declining and depending on the pace of global recovery from the pandemic, by mid year we could be dipping into spare OPEC capacity and perhaps even hitting a wall by Q3 as decline rates and lack of global investment bite the industry in the proverbial butt. Traditional suppliers will be unable to ramp up supply fast enough – Iran will likely still be under sanction and Venezuela is a gasoline importing basket case. This leaves Canada as a place that can actually provide a steady, low decline and predictable supply.
This is all of course bullish for prices.
In past years when I said bull, I got too bullish. This year will be no exception. My year end WTI price is $65.23 and my average price for the year is going to be $57.38. Look – everyone can make money at these levels if they try, so all I can say is remain calm.
Price of Natural Gas
Ah natural gas, I can’t quit you!
For the 5th year in a row, as I write about everyone’s favourite transition fossil fuel, natural gas has been disappointing me and pretty much all of Canada with lousy pricing for what seems like forever. Showing great potential at times before collapsing back to “super-cheap alternate fuel – why don’t we use even more of it” status. And like any true forecaster for natural gas, we watch the storage reports with bated breath and hope for a polar vortex to descend on New England, spiking prices and proving our bullish forecasts right for yet another fleeting week before crashing back to earth with a heat wave in the Midwest.
Here’s the deal. Gas consumption in the US is way up. Exports of LNG are growing rapidly and exports to Mexico are also rising. Thanks to COVID and the crash in oil prices and the inability for LTO players to make even a smidgeon of money, production and supply in the United States has stalled out, even with the reliable Canadian relief valve. The catalyst for gas that was a still a year or two out is now right in front of us – LNG Canada, more export capacity out of the US, the completion of the coal to gas power conversion. I suspect 2022 is going to be better than 2021 but 2021 is going to be better than 2020 and, all things considered, for gas 2020 was pretty good. It’s a multi-year play but you have to start somewhere.
My year end price for natural gas (NYMEX) is going to be $3.93 and the average price will be $3.07, up from last year. AECO will again have a better year than I think many Canadian producers are used to, which, combined with oil sands prospects should be a welcome bonus for the Alberta government’s coffers.
Production
For many producers in the Permian and continental United States, 2021 is going to be a weird year. While drilling will recover with prices over the course of the year, it isn’t going to be dramatic as players wait to see what the Biden administration rolls out. More impactful however will be the fallout from 2020’s collapse in the rig count and the number of wells drilled and completed. To maintain production against its epic decline rates, the US LTO industry needs to drill and complete thousands of wells every year. This volume was not met in 2020 and the production impact is going to reverberate throughout 2021 regardless of any drilling activity over the course of the year.
Capital for new drilling programs is scarce, the pace of completions has slowed to decade lows and the rig count is down 600 from the beginning of last year. The monstrous DUC inventory has been mined and the dirty little secret of the DUC count is that probably a quarter of these were never going to completed anyway. Rig count should stabilize at current levels in the United States as companies live within their means, targeting the maintenance of production levels with modest growth as commodity prices allow. While in 2019 and 2020 a significant amount of capital found its way into the Gulf of Mexico, the Biden approach to offshore may slow that plan down.
All of the preceding is a long-winded way of saying that we believe that US production will decline early in the year before recovering into year end. If we assume the year end production numbers of about 11 million bpd of production in the US are correct, we are going to pick that exact same level for year end. In this scenario, production could dip as low as 10 to 10.25 million bpd in the middle of the year.
In Canada, activity levels should over the course of the year more closely resemble 2019 than 2020. Pockets of conventional unconventional (tight oil, deep basin, condensate, liquids rich) activity in places like the Duvernay/Montney/Viking and the Bakken but not much in between. Rig count will also pick up in British Columbia as drilling to support LNG Canada picks up. Continued optimization and slow-footed brownfield expansion in the oilsands will continue, but not much more.
While the year will be bullish for oilsands producers and investors, the market signals are not all in for any material expansion. We are thinking not much growth above replacement of natural declines, notwithstanding recent record production levels. If Enbridge can get Line 3 substantially advanced by Q2/Q3, expect some whispers of announcements of expansion.
OPEC production levels will depend on what happens with the re-upped OPEC/NOPEC agreement at the various jump-off points through the year. The key to the agreement is the Saudi/Russia collaboration and unilateral Saudi cuts which are planned to continue at least until June. If shale growth surprises to the upside, expect the Saudis to act to rein in prices. It’s a risky game but I would think OPEC/NOPEC output should be flat year over year, with the extra Saudi cuts (implemented in 2021) unwinding as the market strengthens
In the rest of the world, it’s a limited growth scenario. New projects in the North Sea (Johan Sverdrup field) will continue to ramp up and investments in Africa will come on-line. Latin America will be sold as a growth area – look for Brazil to disappoint because that is what they do – but material growth is a couple of years out.
The fact that global supply growth is not expected to come from a slowing US shale sector should be concerning because it now starkly exposes the lack of investment in other regions and being such a capital dependent industry, production can turn negative as quickly as it ramps up. Inventories can come down very rapidly and we have seen over the last few years how difficult it is to reverse a trend once it starts. If the globe recovers quickly from the pandemic induced consumption decline, it would not be surprising to see consumption snapping back above 100 million barrels of oil a day by year end which would be a supply crisis and the resultant price spike could stick a pin in the economic recovery. We actually need production growth.
Activity Levels
On the Canadian side, notwithstanding my relatively bullish sentiment, this year is going to be a hard one to predict. But I am going to do my best. 2020 was the worst year on record for Canadian E&P, so a repeat is unlikely.
That said, there is always a lot of uncertainty in the Canadian market given our well-documented egress issues, pricing dilemmas and purported federal government hostility to industry. While we no longer are subject to free natural gas for extended periods of time (props for AECO) and differentials have settled down, these price signals are taking their sweet time converting into upstream activity.
As I have explained previously, given Canada’s production mix, the need to drill isn’t consistent across the basin. With only about 25% of Canadian production subject to high decline rates, the incentive to drill isn’t always there because the pipes are full of heavy oil. Plus, we don’t have the intense drilling imperative that the US has, where more than half of their production has a 35% decline rate and lower production levels per well so they have to drill like lunatics just to stay in one place. It is easy to see the excuses Canadian oil and gas companies have for sitting on their hands for much of 2021. Yet capex programs are being announced and LNG Canada is another year closer.
And while we Canadians are creatures of habit and it’s winter and in winter we drill, there is no obvious catalyst for serious growth in traditional upstream oil. If Line 3 were close to being filled, we might have got something, but until then, we are stuck in neutral.
With all that in mind and taking into account OPEC and LTO, plus no accountability whatsoever, I will confidently predict that activity in Western Canada will be … pretty much flat with 2019. This ironically will represent a spectacular recovery to what was an awful year. I expect E&P companies to hold their cards close to the vest while awaiting news on egress. Capex spend in the first half of 2021 isn’t going to light anyone’s hair on fire, but activity will pick up in the latter stages of the year on the impending completion of Line 3. So less activity in H1 is going to trade off high relative activity in H2.
Expect to see 4,000 – 4,250 combined oil and gas completions in 2021. Capex should be up 15%, with an upside for 20%.
Given where things could be with all the other headwinds we face, these numbers are OK, especially with decent pricing, but it’s hard not to feel a little tinge of disappointment at a lost 2020. Blaming the Trudeau Liberals and the carbon tax may feel good, but this one is really on US regulators (Line 3 and KXL) and, of course, that whole pandemic thing.
It’s already been discussed elsewhere but drilling activity is expected to be flat and capex in the US is expected to be up 5%. It’s going to be a different year for American drillers – still activity, but the newfound capital discipline will make things seem tight.
M&A Activity
M&A in the oil patch, at least the North American upstream side, managed to register a robust 2020. There were certainly signature deals on both sides of the border and not all of them involved bankrupt producers. I expect this trend to continue through 2021 as property consolidation, non-core asset sales and private equity investment all pick up as the industry adjusts, yet again, to a new normal. Expect the M&A activity to be broadly based – upstream, downstream, oil, gas, services and everything in between.
On the Canadian side, M&A activity should pick up as portfolio rotation out of the Permian brings American and international investors back to Canada and our absurdly high Free Cash Flow yields start to attract interest.
Capital should become easier to access as the year progresses and the prospects for the industry firm up. There are many funds and investors currently playing the ESG game and shunning traditional oil and gas. These types of developments are to be expected in an energy transition world but don’t expect to it to become all-consuming in a yield seeking world.
As in prior years, there are a number of Canadian companies that are historically undervalued cash cows and in a post-COVID world where all the returns in Tesla have already been realized and BitCoin gives you heart palpitations, boring can be good.
Expect a prominent Canadian name or two to find themselves with new foreign owners as the year progresses. Construction on LNG Canada should also lead to M&A activity amongst the gas-weighted companies as they seek to fill the gas supply not already developed by the project proponents. So, American or foreign interest coming back into Canada – crazy I know, but I did say it was a “fearless” forecast.
On the services side, we are very bullish on energy infrastructure and related industries and see that as an area where Canada will see a fair amount of activity. Mid and downstream oriented companies will continue to be of interest to strategic consolidators and private equity. On the upstream drilling side, ancillary service providers such as safety and testing companies will attract interest in addition to traditional drill-bit focussed companies, particularly as we get more clarity into H2.
In addition, Canadian companies are well-known for their technology and solutions-based approaches to innovation and there is a well-worn path of US PE and strategics coming north of the border to snap up cheaper Canadian tech. With an uncertain market in the United States, look for these companies to draw interest, particularly ones that have technologies that address emissions. Canada is a currency advantaged, undervalued and stable market for consolidators tired of the madness in other markets. Global recovery and growth indicates a commodity super cycle, likely the last big run of my career. Show me the money people!
Canadian Dollar
The Canadian dollar should see some relative stability this year with commodity prices, but there is no real catalyst to send it upwards aside from timing differentials with the United States in the economic cycle. Every country around the world has blown its brains out with debt the last year to spend out of the pandemic so on a relative basis, where does the change come from? I fully expect the Canadian dollar to reach perhaps as high as $0.80, maybe even $0.82. How daring is that for a forecast?
Infrastructure
Finally, right? I know in the media things look bleak, what with Trudeau and Biden, ESG and the energy transition and all that jazz, but it may surprise people outside of the energy sector that we are kind if in the early to mid stages of an infrastructure supercycle in Canada. This should continue well into the mid-2020s. Here’s what I see in 2021 – with only one signature project giving me pause:
- Line 3 complete and operational by year end
- TransMountain Expansion well underway with multiple spreads operating during the year in Alberta and BC
- Coastal Gas Link continuing notwithstanding current challenges
- Keystone XL, now firmly a political football again, is going to be a Biden victim, for now. He will give Trudeau a win on a different file, which may or may not help Alberta but there is little chance he breaks this fundamental promise out of the gate. Long term, if he also follows through and shuts down DAPL, there is a strong market case to revive KXL. So it’s not dead, dead. Just mostly dead. TC Energy waited too long and may need to wait a bit longer.
On top of this, some 70% of the planned spend on commercial wind and solar projects for the balance of the decade are planned for nasty carbon spewing Alberta. Take that Laurentian elites! Combine that with continuing Petchem investment, Site C in BC, the NGTL expansion and other initiatives such as Carbon Sequestration and Storage and the conclusion is inescapable. People are spending money. In Western Canada. Of all places! On something other than Vancouver real estate. Imagine if we got a battery play. People’s heads would explode.
Stock Picks
So last year was a disaster of sorts. I outperformed the index, as usual, but my bacon was only saved by my showy pick of a renewables company.
So this year I am determined to hit it out of the park, especially on the Canadian side, which is going to be a challenge with the activity levels I’ve predicted, but if my oilsands prediction holds water, then at least one side should benefit.
True to my rules, I have to pick two Canadian E&P’s as well as two service-oriented companies and, finally, one non-Canadian producer and a service company.
Here goes nothing…
On the Canadian oil and gas E&P side, I am going to stick with my oilsands theme. Both of these companies should benefit from the current environment and one in particular has been beaten down so hard, they need a hand up
Pick #1 is Canadian Natural Resources. Look, I know, it’s an easy pick. CNRL (CNQ) is the beast of the West. If you look at a spiderweb chart of the companies and assets they’ve acquired in the last decade or so, it’s a who’s who of Alberta mavericks, US and international firms that got burnt by flaring and companies that flew too close to the sun. If you have bought everybody on the block and are still alive, you must be doing something right – it’s the Monopoly principle. As I say on Twitter, one day we will all be working for Murray Edwards, but for now, Murray’s company works for my Forecast.
Pick #2 is Cenovus. So yeah, I’m going hard on oilsands. Deal with it. Cenovus has been dumped on for years and recently swallowed Calgary icon Husky. Cash flow profile is great and as long as they don’t smoke a Halifax donair or two and get any renewed East Coast aspirations, they should be fine.
On the Canadian service side, my first pick is going to be … Ensign Energy Services. Ensign is one of the largest land-based drilling companies in the world with operations in all the key basins in Canada and the United States to complement key international operations in Latin America, the Middle East and Australia. Ensign is also materially owned by, you guessed it, Murray Edwards. I’m going all in – don’t disappoint me!
Last year I selected a renewables company for my second energy service pick and it delivered the only positive return of the year in my portfolio of junkyard dogs. So being a creature that learns from positive outcomes and mistakes, I’m going to do the exact same thing again this year. The company I pick for stock #4 is Innergex Renewable Energy. Why them? Why not. Innergex is a developer, owner and operator of renewable energy power facilities. Their portfolio currently consists of interests in 75 operating facilities with a net installed capacity of 2,742 MW (gross 3,694 MW), including 37 hydroelectric facilities, 32 wind farms, and six solar farms. See? Even I am part of the energy transition.
In my search for a US producer, I am of course fully committed to finding someone who has low debt and great prospects. Bit of a needle in a haystack hunt I know, but here’s what I’m going to do. First I’m going to ask myself what company Murray Edwards would buy, then I am going to ask myself what company I would buy. Then I am going with Murray’s pick. That pick is Phillips 66. What? That’s right. A big refiner. The one piece missing from the CNRL beast. Plus, it is the only major refiner to prioritize renewable fuels from its refineries, using human-derived waste products as feedstocks for diesel. It’s a renewable oil and gas play! A twofer!
On the service side, in keeping with my theme of gradual recovery, I am stepping outside of my comfort zone and I am going to go with… an international play. And it’s not a serviceco, instead it’s a shipping company. Scorpio Tankers Inc. is a provider of marine transportation for petroleum products. The company is headquartered in Monaco, which is, ironically, where Murray Edwards parks his boat.
That’s it!
Fearless? Sure. Crazy? No doubt. Food for thought? I hope so.
A few final predictions in the quickfire round…
Impeachment – Dragged out and defeated, narrowly
Super Bowl – Lamar!
Stanley Cup – Not Toronto, sheesh
PM – Trudeau
Calgary Mayor – Roger Baker
Portfolio performance – up 16%
My time here is done.
Invest wisely.
