One prominent energy investor says that reliance on Canadian energy in the U.S. provides Canada with leverage amid the current trade dispute between the two countries.
Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners, said in an interview with BNN Bloomberg Monday that he is “optimistic” that the pain of tariffs between Canada and the U.S. would be “so profound” for both nations that it would make for a short dispute.
He said that it’s “very clear” the U.S. needs Canadian oil, pointing to some refiners in the upper Midwest, known as the PADD 2 area, that import around three million barrels per day.
“They have no alternative. They can’t truck it or barge it. And so, their reliance on Canadian oil potentially gives us enormous strength going forward. And so, I really hope this is going to be a wake up call for energy policymakers, irrespective of political leanings, irrespective of party, to put the past behind us and build out incremental takeaway capacity both to the west coast and east coast,” Nuttall said.
“It is very clearly a strategic necessity.”
On Saturday U.S. President Donald Trump signed an executive order to impose a 25 per cent tariff on all goods from Canada taking effect Tuesday, with an exception for energy which would face a 10 per cent tariff. Canada responded with a list of U.S. products that would be subject to 25 per cent tariffs.
CTVNews.ca reported Sunday that senior officials noted additional measures could be contemplated, including whether a further response on energy would be needed.
Nuttall said Canadians felt a “sense of betrayal” over the weekend, but the Canadian government should also face blame. He added that Canada should not have put itself in a situation where another nation could threaten our economy “to as much as a four per cent GDP (gross domestic product) hit.”
“The lessons that we take away from this and the damage I think that has been done to the relationships, to the view that we’re friends and closest trading relationships…we really need to evaluate that going forward,” he said.
“And from an energy perspective, it makes it a necessity to make it a national priority to build out more pipelines both to the east coast and west coast, to diversify the customer base. If we had the ability to circumvent the U.S. refineries, we would not be in this situation as a country.”
As a result of the tariffs, Nuttall predicts U.S. consumers to feel the impact at the pump, estimating gas prices could rise around 15 to 20 cents per gallon.
“That’s a very obvious impact. It is inflationary very clearly, and it should put to rest any mistaken belief that tariffs are not inflationary and it’s the producer, not the consumer that’s going to be eating it,” he said.
Impact on energy stocks
Given the current circumstances, Nuttall says he sees impacts for Canadian energy stocks.
“We view this as a worst-case scenario. We have cash flow falling by seven per cent, and we have free cash flow falling by 20 per cent. In that vein, we have Canadian energy stocks, those that we could model with some degree of precision, still trading at 10-11, 12-13, 14 per cent free cash flow yields,” he said.
He noted that Canadian energy stocks are lagging their U.S. peers, due to concerns around tariffs.
“We’ve been taking advantage of the weakness over the past few weeks, adding to those names that we think are most vulnerable to what should be a short-term situation. And even if we’re wrong, that this is long-term issue, the stocks are already valuing that,” Nuttall said.
“And at the same time what we’ve seen (is) our companies have been deleveraging for the past several years and so balance sheets are incredibly strong, able to weather the storm that we find ourselves in right now.”
Overall, Nuttall said Canadian energy stocks would have been more impacted if energy faced a 25 per cent tariff.
“We’re not going to cheer a 10 per cent tariff. It’s just a pathetic situation that our country is finding ourselves in. Twenty-five per cent clearly on the rest of the economy, but a 25 per cent tariff on Canadian oil would have been much more significant. Ten per cent, it’s annoying, it’s insulting, (but) we can deal with it,” he said.
