Canadian Energy Sector: Are We at the Peak of a Cycle?
The Energy sector is one of Canada's largest and most important industries. Get an overview of the energy sector and list of ETFs.
Energy is an integral part of our lives, from the products we use, the foods we eat, and the homes we live in. The functioning of Canadian society is heavily dependent on different sources of energy. In 2022, energy has been a bright light in an otherwise dim market of returns. However, many investors are hesitant if the Energy sector can continue its strong returns, but if so, they are seeking ways to potentially gain exposure.
Overview of the Canadian Energy Sector
The Energy sector is one of Canada's largest and most important industries. This is largely due to a large amount of oil production capacity within the vast geographies of the second-largest country in the world. Canada has large oil reserves located outside of oil sands, primarily in Alberta, Saskatchewan and offshore in Newfoundland and Labrador.
Within the S&P/TSX index, the Canadian Energy sector makes up almost one-fifth of the index, comprising 19.0% of the overall index as of May 31st, 2022. Given its large weighting in the S&P/TSX index, the Energy sector is a large driver of the overall Canadian stock market. Some of the large constituents within the S&P/TSX Capped Energy Index are:
- Suncor (25.9% of the index weight)
- Canadian Natural Resources (23.5% of the index weight)
- Cenovus Energy (11.6% of the index weight)
- Tourmaline Oil (7.9% of the index weight)
- Imperial Oil (5.5% of the index weight)
There are many other smaller energy companies based in Canada. However, the companies mentioned above are the large drivers of the index due to their larger relative market capitalization. Based on the industry's size, the energy's importance, and more specifically, the oil & gas industry within Canada should be at the top of investors’ minds when investing in the Canadian market.
Are we at the peak of a cycle?
Crude oil prices remain at historically high levels, which begs the question: Are we at the peak of a cycle and is downwards the only direction that prices can take? Of course, it is nearly impossible to predict the direction of commodity prices as there are many intricacies involving the industry's supply and demand dynamics. However, counterintuitively there is a large amount of evidence to support that prices may remain higher for longer. Namely:
- Large underinvestment in expanding capacity
- Returning demand from Covid-19 restrictions, especially in China
- Supply chain constraints from Covid-19
- Supply limitations from Russia’s invasion of Ukraine
Although Energy stocks have performed exceptionally well compared to the rest of the market, which is largely selling off, many investors feel that stocks within the Energy sector are still undervalued. There is still a large amount of upside in the industry.
Longer-term, there is a thematic shift toward “greener” energy sources such as renewable energy (wind, solar, hydro etc.). However, there is still a massive amount of energy consumption that fossil fuels meet the shortfall. So, it would appear that while the industry may not remain at current levels forever, there will still be a large market for fossil fuels, and Canadian Energy companies, in particular.
Ways to Invest in Canadian Energy via ETFs
For those who wish to gain exposure to the Canadian Energy sector, ETFs are a cost-efficient and simple way to gain exposure. The following are some Canadian Energy ETFs:
XEG (iShares S&P/TSX Capped Energy Index ETF)
- AUM: $2,309M
- Expense Ratio: 0.61%
- YTD performance: +50.6%
ZEO (BMO Equal Weight Oil & Gas Index ETF)
- AUM: $267M
- Expense Ratio: 0.61%
- YTD performance: +38.3%
HXE (BMO Equal Weight Banks Index ETF)
- AUM: $89M
- Expense Ratio: 0.27%
- YTD performance: +33.0%
Data for this article is as of June 27th, 2022.
Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.
