A case for Canadian oil sands producers

Low "all-in" production costs, a stable regulatory environment, increased export capacity and compelling stock valuations make Canadian oil producers a slick investment option, says Fidelity's Maurice FitzMaurice.

• Fidelity Portfolio Manager Maurice FitzMaurice believes the total return potential of Canadian energy companies that produce oil from sand regions in Western Canada are currently among the most appealing investments within the energy sector.
• "Given my favorable intermediate-term outlook for crude-oil prices, and due to the unique aspects of these companies' business models, I believe Canadian oil sands producers have particularly compelling growth prospects," says FitzMaurice, who co-manages Fidelity Advisor^® Energy Fund with Kristen Dougherty.
• In helming the sector-based, equity-focused strategy, the managers look to invest in the stocks of companies that they believe are mispriced relative to their intrinsic value for a variety of reasons, including cyclically depressed earnings or overly positive or negative investor sentiment.
• FitzMaurice says Canadian oil sands producers outshine U.S. oil producers for several reasons. First, they have decades of oil reserves — crude oil that can be extracted from known underground deposits — compared with much shorter reserve lives for U.S. and other international oil producers. Second, the oil-production decline rate for companies north of the border is low, which may lead to light spending on maintenance in the oil-rich sand regions, he says.
• "Operating costs are higher in Canadian oil sands regions," FitzMaurice acknowledges, but notes that minimal maintenance costs could lead to "attractive and globally competitive 'all-in' production costs."
• Among other attributes, FitzMaurice likes the regulatory and political environment in Canada, which he considers fairly stable and supportive of the oil and gas industry, due largely to its importance in terms of employment, economic development, government royalties and taxes.
• He also cites new export capabilities for these companies. "Egress from Canada, which has historically been limited, has improved with the recent startup of the long-delayed Trans Mountain Pipeline — a system that carries crude and refined products from Edmonton, Alberta, to the coast of British Columbia — ensuring that producers have access to export markets at a reasonable cost," he says.
• FitzMaurice notes that, despite these positives, Canadian oil sands firms trade at a large valuation discount to their U.S.-based oil-and-gas-producing peers. For example, on consensus 2026 earnings estimates, the large Canadian oil sands producers trade at a free-cash-flow yield of 10% to 13%, versus 8% to 9% for U.S. oil & gas exploration & production firms. He cautions that potential U.S. tariffs on Canadian-produced oil could potentially hinder these companies' earnings growth, but believes the market has already priced in this risk.
• As of February 28, the fund had sizable out-of-benchmark positions in Cenovus Energy, Canadian Natural Resources and Suncor Energy, all Calgary-based oil sands producers.
• "With active capital-return programs tilted toward share buybacks, I believe these Canadian oil sands companies should be able to drive a significant decline in share count while modestly growing production and earnings, leading to a healthy increase in free cash flow per share," he concludes.