Buffett Bets on Canada's Energy Industry, Low Valuations will Improve
Media analysis articles on Monday pointed out that billionaire investor Warren Buffett’s Berkshire Hathaway’s investment of more than $500 million in Canadian Suncor Energy in June 2013 had attracted many investors. The reader was quite surprised. While many Americans view this as another bet by Buffett, known as the Oracle of Omaha, on undervalued assets, many Canadian energy fund managers who have long been trapped in this area are even more excited - The once-booming sector has been languishing in the past few years, and investment from Berkshire Hathaway could be a sign that Canada's energy industry is about to get back on its feet.
U.S. oil and gas suppliers have fared far better than their Canadian rivals since 2009, as measured by the performance of the S&P Crude Oil and Natural Gas Exploration and Production Select Index. The index has risen about 150% over the past five years, while the S&P Capped Energy Index, which tracks the stock performance of Canadian energy providers, has gained just 30% over the same period.
While Buffett has never explicitly stated why his company purchased Suncor Energy's nearly 18 million shares, the unfavorable performance of its stock price may have played a role in the decision. Suncor Energy's stock price has risen 17% since June 30, 2013. Although Berkshire Hathaway sold 5 million shares in December at a gain of about 20%, it still holds Suncor Energy is close to 1% of the stock.
"He's an extremely value-oriented person who wants to buy businesses that are undervalued over the long term," said Martin Pelletier, fund manager at Calgary-based investment firm TriVest Wealth Advisors. "Canadian energy has long been a The market is trading sideways.”
Canada's energy industry, worth hundreds of billions of dollars, accounts for 6.8% of the country's gross domestic product and employs more than 280,000 Canadians. In addition, Canada is a net exporter of oil and natural gas, with 90% of its energy exports entering the U.S. market.
The Canadian energy industry was once recognized by investors as one of the most promising markets. The S&P Capped Energy Index rose 387% between November 2000 and June 2008. But that changed in 2008, when the United States discovered oil in North Dakota and has ramped up domestic production since then.
In addition, the sluggish growth of the Canadian energy industry is also related to factors such as the price difference between the West Canadian crude oil contract and the U.S. West Texas Intermediate crude oil contract. There has been a long-term gap between the two futures contracts. In the fall of 2012, Canadian crude oil prices were even $40 per barrel lower than U.S. oil prices. This was considered to have caused serious harm to many Canadian oil companies.
Most industry experts blame the persistence of this spread on Canada's poor energy infrastructure, which has made it increasingly difficult to ship oil from Canada to the U.S. Gulf of Mexico, causing domestic supply to pile up. Many companies currently use rail to transport crude oil, and many believe this supply issue will be resolved once the Cornerstone XL pipeline can be approved.
