Oil is cyclical, but while the equity and bond markets are showing signs of recession, oil continues to shrug off concerns about a slowing economy. Oil may have sold off on days about lockdowns in China, but it bounced right back because supply and inventories are too low.
ESG investing trends have choked off capital to this industry and its resulted in less investment to replace natural reserve and production declines (oil wells generally have decline rates of 4% to 5% a year). We've underinvested in this industry for years.
The Canadian E&P's, especially CNQ (Canadian Natural), CVE (Cenovus) and IMO (Imperial) are the best plays on this thesis. Why? These are mostly oil sands producers. Oil sands have very long life reserves, low natural decline rates and low levels of maintenance capex to keep production steady. Suncor (SU) is the largest in Canada, but they do a lot more than just oil sands and it isn't as pure of a play.
Per Bloomberg, consensus 2022 estimates on Free Cash Flow (FCF) Yields:
CNQ: 13.7% FCF Yield ($14.7B FVF, $107.2B EV)
CVE: 12.5% FCF Yield ($8.3B FCF, $66.2B EV)
IMO: 14.5% FCF Yield ($6.821B FCF, $46.9B EV)
These may not be household names in USA, but they are top tier Canadian companies with strong balance sheets (Imperial Oil is actually 70% owned by ExxonMobil). Proven reserve lives of these companies are greater than 20 years, compared to the American companies that are typically in the 12-14 year range.
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