On the Money with Dynamic Funds

PARTICIPANTS

Jennifer Stevenson
Vice President and Portfolio Manager

Scott Reid
Associate Portfolio Manager

Mark Brisley: You're listening to On the Money with Dynamic Funds, the podcast series that delivers access, insights, and perspective from some of the industry's most respected active managers and thought leaders.

Tom Dicker: Jen and Scott, we're going to talk about energy today, as may not be a surprise to you. Tariffs have been on the top of people's mind for the last little while, but it has also been pretty volatile. Can we just get into the nuts and bolts of supply and demand for oil right now? Where does that stand? Maybe just going back a couple of months to where we stand right now.

Jennifer: Yes, volatility, it surprises everybody and surprises nobody at the same time. If we just look at the volatility we've had, it's even on the last quarter, September, the market was focused on Chinese demand for oil being weak, coupled with OPEC+ talking about bringing back some of their curtailed barrels starting on January 1st. We had weak demand, more supply, that pushes prices down, which is then the incentive for people that trade the commodity to pile on and sell or short it. We had all of those things acting on oil to push it down.

Then roll into October, and geopolitics, people had to realize, was still a thing. We had really increased tensions between Israel and Iran and truly fears globally of a wider Middle East conflict, more Iranian sanctions threatened. In fact, I had a trip booked for a variety of meetings in Saudi Arabia that was canceled because the fear of tensions was that broad. It's been rescheduled. I'm going week after next, so let's calm down. That pushed oil prices up in October. Then December, OPEC+ had a big regularly scheduled meeting, but they had to discuss the amount that each country could produce, their quotas, when to bring back on some of their curtailed barrels, the duration of the agreement.

They put in place a comprehensive agreement that goes out to the end of 2026. They also announced that they weren't going to bring any barrels on until the beginning of April, so not the January 1 fear. They reminded everyone, which they've been very consistent about, that their goal is oil price stability. That's really, really important to them, and that's important to us when we're thinking about investing in this space, is understanding those supply and demand dynamics.

Tom: That's a good recap. How do you think about the go-forward on supply and demand into 2025?

Jennifer: I think it's really important because there's this sector, the stocks, and the commodities get so affected by all the daily news churn, whether it's political or geopolitical or weather, or take your pick, the list is long. If you spend the time and really understand what's going on with the fundamentals of supply and demand, then you can make realistic price forecasts, look at realistic stock valuations. Then when things pop up, that becomes more noisy because you understand the signal that is the direction of oil price based on supply and demand. It's just numbers.

For us, China is not the growth engine in oil demand that it was. That's fine, it's pretty stable. Oil demand continues to grow, but it's pushed by India, that's a big one, Southeast Asia, and then what I like to call the global South. That's our emerging economies that are adding population and adding GDP growth and increasing their energy demand. That is the demand side. On the supply side, it's pretty balanced with that demand growth. That's a nice place to be for prices. That supply growth comes from Canada, from the US, from Brazil, and from Guyana. That's a nice situation, but then we think about what's the noise.

The noise is drill, baby, drill. Aagh. Drill, baby, drill does not mean we're going back to shale 1.0 10 years ago, and we're going to lose our minds and throw a bunch of money in the ground. What drill, baby, drill really means is this administration wants to be receptive and friendly to natural resource projects. You want to build a gas plant, you want to put in a pipeline, you want to run a power transmission line, they're going to try and reduce the permitting delays and reduce the regulatory overhang and make it happen. That's good. That's really good.

The oil companies answer to shareholders, they don't answer to the government. I've talked to so many CEOs and said, "Yes, what do you think about drill, baby, drill?" They're like, "We answer to you guys. We're all about capital discipline and shareholder returns. That is the deal." I'm not concerned about drilling at all on that side. I'm not concerned about things like, "Oh, well, OPEC or Saudi increased supply because the U.S. is going to put more sanctions heat on Iran."

Everybody's watched that movie before, did not have a happy ending. Saudi and OPEC, again, focused on price stability. Understanding all this stuff, I think, is really important. It just gives us a view that oil prices in this $60, $70 range, that looks really solid going forward. The free cash flow generation from the companies we invest in and the dividends, dividend growth, and buybacks they do in that price environment is awesome.

Tom: There's no magic wand for Scott Bessent to get his three million barrels a day that he's talking about out of the US?

Jennifer: No, no, that's fantasy, truly.

Tom: Oil does look pretty solid overall, but we've seen the news lately. What are you worried about? Are you worried about tariffs? How do you think about the implications of that for your sector, which seems to be, at least from the Canadian perspective, slightly spared from the worst of the worst?

Jennifer: Yes, totally right. It started out that tariffs were 25% for everybody, and then it became 10% for energy. I think the key thing with Trump is he's a businessman, he's a deal-doer, he's a negotiator. What does he want? The hot buttons right now look like it's fentanyl and illegal immigration, and maybe our NATO spending is a percentage of our GDP. If we just look at the example of Colombia, which is recent, there were planes filled with deportees heading for Colombia. Colombia said, "No, they can't land." Trump said, "25% tariffs for you," or maybe the number was higher, it was big. Colombia said, "Oh, okay, land away and guess what? No tariffs." That's my simplistic distillation of that event.

Tom: [laughter]

Jennifer: It just shows you that there are means to an end. I think the 25% down to 10 so far for Canada for energy shows two things. One is that we have already stepped up border patrols, drug enforcement, criminal penalties, that sort of thing. Also, there's more education in the U.S. government about energy. Like the new energy secretary, Chris Wright, super highly educated, very well-spoken, but he founded an oil field services company called Liberty. He completely gets it.

I think that the ability for the government of the US to understand what's happening with tariffs is improved. If you just look at the numbers, just to get into more detail on your question, the US produces, pick a round number, 9 million barrels a day of oil, and they export about 4. That's light sweet oil, and I'll explain what that means. They also import 6 or 7 million barrels a day of medium and heavy sour oil. 4 of that comes from Canada. The US makes light, exports some of it, and imports heavy. Heavy oil is like comparing molasses to light oil is maple syrup.

The heavy oil takes more processing power, so it's cheaper to buy. They refine it, process it in America, so they add that value down there. Their refineries are made to run that kind of oil, make the most money running it. They could run light oil, but it wouldn't give them the product they need, wouldn't give them the profitability they count on, and you can't get it to where the refineries are. There's whole kinds of logistical issues.

When you look at what Canada provides to the US, when people say, "Oh, the US can produce their own," or, "Oh, we can get it from somewhere else," like where? Iraq and Venezuela and Mexico? Please. I just think logic, numbers, education about the sector, and the reality that-- There's 2 million barrels a day almost of oil that goes to US refineries that can't even get there without being in a Canadian pipeline. The tariffs, if they happen, they're short, but I think we probably work our way out of them.

Tom: Thanks. Just switching to you, Scott, let's talk about gas. Tariffs apply to gas, too, but those stocks have been doing pretty well lately. What's your view on gas stocks?

Scott: Yes. Tariffs would be expected to apply to natural gas, but we're still seeing exciting evolution in that space that makes us constructive on the outlook. For over a decade, natural gas has been a very well-supplied market, with the exception of a brief period during the European energy crisis a few years ago. Recently, the landscape has actually shifted. Global LNG demand, particularly from the US Gulf Coast and Canadian West Coast, is driving strong near-term fundamentals. At the same time, we see meaningful step-up in expected power and industrial demand driven by themes such as reshoring of manufacturing and the rapid build-out of high-power industrial data centers.

On the supply side of natural gas, investment has actually been constrained due to low prices. To meet this growing demand, future supply will need to come from higher-cost resources. That puts Canadian producers actually in a great position, even in the event of tariffs actually being implemented, as they are amongst the lowest-cost suppliers with abundant reserves. That said, we're mindful that demand and supply growth won't be perfectly smooth. There could be periods of volatility. However, Canadian gas producers have an additional advantage. They also generate significant cash flow from high-value condensate, which helps support their earnings even when gas prices are weak.

Overall, we believe we're entering a new price era where $3 natural gas serves as more of a base. That's a meaningful step up from historical norms. That creates a strong setup for cash returns to shareholders and makes these companies increasingly well-suited for long-term dividend-focused portfolios.

Tom: Scott, we got about a minute left. One of the areas we haven't talked about yet is pipelines. Jen and you and I had spoken about this earlier this week. In a world where there are tariffs or without, what's your outlook for pipelines?

Scott: Certainly, we see pipelines as being really well-positioned. From a defensibility standpoint, both oil and natural gas pipelines generate cash flows under-regulated or take-or-pay contracts, meaning their revenues are largely insulated from market fluctuations or tariffs. The US remains highly dependent on Canadian production. Even if tariffs were introduced, the volumes moving through these pipelines effectively wouldn't change because they're essential to meeting demand.

Then on the positive side, pipelines are also benefiting from a favorable regulatory environment and easier permitting, which is supporting infrastructure expansion. This is important because on the natural gas side, given significant increase in demand we talked about, it requires continued investment in transportation capacity to get that supply to market. We also like that, despite some political talk about dusting off old pipeline projects to Canada's coastlines that we don't believe will actually happen, we see the era of massive, complex mega-projects that—are often plagued by cost overruns are larger behind us, instead todays opportunities are focused on lower cost, higher returns expansion that leverage existing infrastructure. So this puts these companies in great position to continue growing cash returns for shareholders, while maintaining strong balance sheets with no major surprises.

Tom: That’s great Scott, we really like the pipes and thanks Jennifer, appreciate you both taking the time.

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