Andriy Yastreb

[music] Hello I'm Greg Bonnell and welcome to MoneyTalk Live brought to you by TD Direct Investing. Every day I'm joined by guests from across TD, many of whom you'll only see here. We we'll take you through it's moving the markets and answer your questions about investing. Coming up on today show: recession worries continue to weigh on the price of oil. Andriy Yastreb Energy Analyst at TD Asset Management is here to talk about the outlook for crude and the energy space overall. And as a reminder of course, you can get in touch with us with your questions for the show and every other show, just email MoneyTalk Live@td not. Or you can fill out the viewer response box under the video player right here in WebBroker. Before we get to our guest today, let's get you an update on the market. A bit of a mixed session on Bay Street and Wall Street. Of course the big event this week is the US Federal Reserve. That decision lands on Wednesday. Right now, 75 basis points. The market is not completely ruling out 100 but there could be some interesting days ahead. The TSX, right now of 82 points. A little shy about half a percent. Air Canada, up to the tune of about 4%. … Let's check in on Dye & Durham right now. Of course this is the maker of legal software. The Australian software firm link, apparently rejecting Dye & Durham's takeover bid. Fairly flat down about three quarters of a percent. South of the border, let's check on the S&P 500. Going in and out of negative and positive territory, of course head of the US Federal Reserve. That's the big event of the reek. Trying to figure out where we might be headed. Right now that brought a read in the American market down about 1/4 of a percent. Let's check in on the tech heavy NASDAQ and see if we have any divergence in the broader market in the tech space. Down about 1/3 of a percent as well. And Bank of America, let's check on one of the heavyweight financials on Wall Street. Right now it's up modestly. $0.35, good for a full percent and that's your market update. The price of oil continues to feel the weight of a looming global slowdown. Crude down about $30 from its peak in June just as the Fed and other central banks are aggressively hiking interest rates. Despite those growth concerns, my next guest says the outlook for oil long-term still remains bullish. Andriy Astrid, Energy Analyst at TD Asset Management joins me now. What are you seeing out there? >> Thank you for having me first of all Greg. I think when I think about oil, in this environment, for the next 6 to 12 months, I like to think about three key drivers: one of them would be Russia, a another one would be OPEC and another one is a potential recession. I called them ROR. For OPEC, I have a chart here to show performance of energy in the past. So if you look at this chart, it shows basically performance of the energy sector relative to the S&P 500 since 2000. And when I looked at the data, I realize that there's basically two different regimes that happened over the past 22 years. In one regime, I called it "OPEC is your friend " as an investor and the other one "OPEC is your foe." When OPEC is your friend, it can influence the supply demand balance and influence price. That is basically what happened early on from 2000 to about 2013. Energy did really well at that point. It outperformed the broader market. It outperformed and most of those years. Quite significant outperformance. Then in 2014, OPEC started fighting for market share with the US share and the picture completely changed. Since 2014 through 2021, energy actually underperformed by about 14% per year and underperformed in most of those years. The good news here, I think now, OPEC is again in the driving seat. I think OPEC doesn't have that much for capacity left in the last two meetings they first increased production by 100,000 barrels and now decreased production by 100,000 barrels. Which tells you that first of all they don't have much for capacity left and also they want oil prices to be higher. >> Alright so we hit the middle part of your "ROR". What about Russia. In terms of this invasion which really turned everything on its head earlier this year. > We almost got induced to it. But as a result of the sanctions in Russia… We need to keep in mind that the actual sanctions in Russian oil have not started yet. They started in December. We don't really know how… If you look at other sections we have in the past, sanctions in Iran, despite sanctions, Iran is still selling oil in the global market. Maybe not as much as they used to but the oil is still flowing. We will see how this impacts the market overall. Because a. Russia is a much bigger supplier of oil than Iran. It supplies over 5 million barrels of crude oil and also over a million to a million 1/2 of product. B. This sanction is not only designed to limit sales of Russian oil to Western world, it also limits Russian ability to ensure their cargoes and tankers. That one might be really tricky for Russia to circumvent. So we don't know exactly how much Russian barrels may be taken off the markets and that is a big unknown for the next 3 to 6 months. On top of that, there's another reason. What we've seen in Europe, we've had Russian gas exports to Europe to pretty much a zero. From that perspective, Putin was obviously interested in using energy as a weapon. He used already all of his leverage in terms of natural gas to Europe. If things don't go well for him in Ukraine, maybe he turns to oil and starts reducing oil exports as well. So I think Russia is one critical factor to watch and it's possible, most likely, in the near term, next 3 to 6 months, it could be a positive catalyst for oil prices. >> So we have that there. Let's get to the last R. Fears of a recession. Was that mean for supplied? What it means for demand really ultimately of the economy turns southward on a global scale? I think you have a chart there as well. What we are seeing in that dynamic of supply and demand. >> Yeah. So this chart shows the crude inventory in the United States. One interesting point we were talking about is supply and OPEC. Tighter in OPEC per capacity. What's interesting is that usually if it's that tight, if OPEC does not have any more barrels to put on the market, you think "well oil needs to be $100 plus." But we don't see that right now. It's in the low 80s. This chart explains to a big extent why. That green line: that's all crude inventory in the United States including the strategic petroleum reserve. That is been drawn down quite significantly here in the past 10 to 11 months. What's interesting about that is the release of SPR barrels is expected to end in October. So as a result of Russian sanctions kicking in December, >> More oil to throw in the market. >> Exactly. This is why we are having such a big SPR release historically, we've only had the strategic reserve for real emergencies. When there is a war, natural disasters that limit actual production and access to oil globally. Well, this time I didn't really have an emergency anywhere. Of that magnitude. But we are releasing a million barrels a day in the United States and conveniently, that stops right before the elections in the US. So we will see what happens going forward. But from that SPR release, that might be another potential positive driver because that's 1 million barrels a day. That's a large amount of oil that has not been released. >> We have a lot to watch there. Russia, OPEC, fears of a recession… At $85 right now, what does this mean for energy companies? >> Well, you know two months ago when I was here, for an interview with you, we were talking about energy. We touched on recession and potential demand destruction due to oil prices and what happens in a recession. Usually, if you have a recession, obviously oil is very cyclical. It does go down and if you have better, rather a bad recession, the price goes down and you have volatility. COVID was the worst case of that. I think, looking at what OPEC has done, surprising amounts and 100,000 barrels caught, that was very notable. Eight. It was a surprise. Nobody expected that. B. I think it was a signal that OPEC is ready to step in and support the market. Even if the overall economy deteriorates in oil prices start going down. So, just going back to the first chart that I showed, relative performance, one interesting part of the chart, those vertical Black bars? They were showing years when S&P returns were negative. And in five out of those six years, energy actually outperformed versus the index. Still its relative performance. So if your index is down 30% and you're only down 25%, it looks like 5%. > But you don't do is that as the next guy right? >> Right. It is interesting. The thing to think about with energy is the high volatility, high cyclical industry. The data shows that not exactly. When OPEC actually has control of the market, when OPEC is there managing supply and demand and trying to balance it, energy performs pretty well. >> So longer term then, everything's been so volatile from day-to-day. You can't turn your head around as an investor. But if you some all that up and you think "look at the crude space six months out of the year." What's your feel for the market? >> I think fundamentally the market is tight. For the past 5 to 7 years, it was low. We are seeing the tightness in the market today that drove the oil over $100 earlier this year. My thinking is if you go into a recession next year, probably you will see more volatility and oil prices lowered at some point. Maybe that triggers OPEC to step in and balance prices. But if we do have a recession, I think what it means is that oil companies and oil executives look at that and they decide to invest less. So for the next year or two we might still see more under investments. So on the way out of a recession, people still have the same supply issues. > Interesting stuff as always. A great start to the program. Andriy Yastreb is here to take your questions about the energy sector. Look at some of those questions just a moment time. Of course here's how you get in touch with us. and now let's get you update on some the top stories in business. Shares of Kinross Gold are in the spotlight today. That after the miner announced a new share buyback program Kinross said it will buy back $300 million in shares for the rest of this year and will allocate 75% of its excess free cash flow to further buybacks. The announcement from Kinross follows talk with activist investor Elliot investment management. The Canadian dollar dip below $0.75 in the US today for the first time since the fall of 2020. The downward move of the loonie recently has largely been a consequence of continued strength in the US dollar. The greenback has been attracting investors amid soaring borrowing costs and global economic uncertainty. The Canadian dollar's head up fairly well against other major global currency in recent months. US homebuilders are feeling less confident about the state of the real estate market. An industry sentiment Index pulled back the ninth straight month in a row. The lowest reading since the start of the pandemic. Significantly higher borrowing costs are getting the blame for sliding homebuilder confidence and nearly 1/4 of respondents reported a drop in selling prices for new homes. And here is the main benchmark index in Canada trading. Right now the TSX up about half percent. We are back now with Andriy Yastreb Energy Analyst at TD Asset Management taking your questions. Why is there so little investment in the oil space? >> Oil prices were driven to $40… For a period of time negative during COVID. So that was one big driver for that historically. But even now, when we had $100 oil, we are not seeing a rush for companies to start investing. I think there are two really big factors that drive that. One is that shareholders look at what happened in the last 5 to 7 years and say they need their cash back. "We want to be paid, we want to have dividends in buybacks and we want our case to be more disciplined with the allocation capital." A lot of management out there, a lot of management thinks differently about how they allocate capital. It's not only that they want to hit their target return rates but they also assume that to get that return they need $50 oil or $60 oil are below. So they are not looking at current spot prices. There are thinking about through the cycle average price of oil when they make investment decisions. Which is quite different from previous years. And secondly, the second issue, obviously less than 5 to 10 years the investment issue became a lot bigger for companies. What it meant for energy specifically was that there is a group of investors out there that pretty much abandoned energy. Because energy is dirty. It produces a lot of CO2 emissions and there are groups of investors don't invest in energy. That's their policy at this point. And in addition to that, those who do invest, they also ask questions about how we are going to reduce CO2 emissions. How will we invest in green energy… What that all means on the high level is at the cost of capital for them is rising. To the point where there is also discussions of "are we going to be able in the future to issue bonds? " Will anyone buys them? Higher yields to do that. Industry is turning to the point of view that needs to be self-reliant and relying more on internal cash flows to grow. >> Fascinating stuff. Let's get to another question right now from our viewers. The pipelines always fascinate me because you look at them as a utility within the energy space. >> I think that's a good way to look at it. I think it's a good place to invest but it depends on your perspective and objective of your portfolio. Because if you look historically, and I'll use TransCanada as an example. TransCanada pays about 5.6% dividend yield right now gross over time. The company also has a goal over the next five years roughly to grow by 6% per year. So if you combine those together, if multiples don't change, you get 6% growth and 6% roughly in dividend, that's great. That's 12%. The problem is that's not only TransCanada. A lot of pipeline companies have too much leverage on their sheets. So to actually grow they need to issue from time to time and receive from TransCanada. So let's say you might be diluted by two or 3%. So that 12% becomes 9 to 10%. What's interesting about that is if you look at historical performances of TransCanada, it was over past five and 10 year periods. Annual return you would get as investors about 8%. So, that's what I'm saying. It really depends on your position and your perspective. How you think about this as an investment. People who want 10 to 15% return, especially if they look for something to buy the energy, they will say "this is not a great investment. Especially being diluted all the time." On the flipside, the 40-year of TransCanada ^... ¸health at the risk of the market. So from that perspective you're getting 8% which is not a bad return from long-term investor perspective. You are getting lower risk and most of that return comes through the dividend. >> Interesting stuff indeed as always. Make sure you do your own research before making any investment decisions. We'll get back to your questions with Andriy Yastreb in just a moment. A reminder that you can email us anytime at moneytalklive@td.com. Or writing your question on WebBroker and hit send. We are back with Andriy Yastreb, Energy Analyst at TD Asset Management taking your questions. What's your Outlook for gasoline… >> One is that oil prices obviously came down from hundred $20 per barrel to around 80 in change and second one is that they crack spreads which is basically the refining margin when you take a barrel of oil and sell the product, that also compressed. So historically, the crack spread was about $10-$20 per barrel range. It shot up to about $60 this year and now recovered and came down to about 30. So the lower oil prices and lower cracks is positive for consumers. We see lower prices at the pump. Going forward, we will see what happens with oil as we were discussing. I think OPEC wants to keep oil prices elevated and $80 in my view is still elevated. But crack spreads might still continue to come down and the driver that is the seasonality. During winter time, people don't drive as much so the amount for gasoline comes down naturally. Secondly, there is demand for diesel that is more tied to GDP growth. So with the announcement from FedEx recently, how they took down their expectations for the rest of the year and signalled a lower demand for their services, that's the kind of change that might happen in the next 6 to 12 months where if you do go into a recession are your economic growth starts to slow down, I see a lower demand for diesel and that also means lower crack spreads and lower prices at the pump. >> All right. Let's take another question. This was a pretty good follow-up of what we were just talking about with crude going into gasoline. Is this a good time to look at some refining names? >> As I was mentioning, those crack spreads started to come down. If you look at the numbers, refining companies have probably the best quarter in their history in the second quarter. Their margins and spread high and they made a lot of money. But those crack spreads pretty much all profitability and if the peak earlier this year was 60 and now below 30 per barrel, that means going forward, their profitability is going to decline and if you continue to see weakness on diesel demand, driven by slower GDP growth, I think that would continue to be the case. So if you're looking at them from a historical perspective, making a lot of money right now in this environment. But if you look prospectively, it looks like that's changing in a more negative way. >> All right. Another question from our viewers. If I'm in environmentally minded investor, what opportunities are there in energy? You talked a bit about the ESG movement. Maybe money not flowing in the traditional energy patch. Is there another space of energy to look at? >> There are several interesting opportunities. Last time we were talking about that we was the US company that does renewable diesel. That one is interesting. They have a legacy commodity business. Another interesting idea is a Canadian services company that produces equipment for gas infrastructure. Enerflex. If you're thinking in the long-term that we need to reduce CO2 emissions, the easy way to do that is to replace cole and other dirtier energy sources with natural gas. we are seeing the growing demand for that in Europe. If that's the demand that could be 1 Potential Way for investors to play that. >> Interesting stuff indeed. We will get back with your questions with Andriy Yastreb interest in moments time. If you have a question on what's driving the markets, send us your questions. There are two ways to get in touch with us. You can get in touch with us any time by emailing moneytalklive@td.com or use the question box right below the screen here on WebBroker. Just writing your question and hit "send" we will see if one of our guests can get you the answer you need right here at MoneyTalk Live. We are back with Andriy Yastreb Energy Analyst at TD Asset Management. Taking your questions about energy stocks. Here's an interesting one a bit outside the conversation we've had up to this point. Nuclear energy. Is this actually green and how does it impact companies like Cameco? >> I would consider to be very green because a nuclear reactor is not admitting any CO2. There is some CO2 involved in nuclear but it's mostly on constructing new reactors. Another thing we need to consider the recent trend in the United States and some of the developed markets where some of the older reactors have been reaching their end-of-life and the regulators have extended those. Sometimes those were extended from 40 years to 60 or even some cases 80 years. When they built nuclear reactors they really overengineered them to make sure they could withstand anything that could happen within the reactor. I think that's a good source of energy that is relatively low-cost because you don't need to build a new reactor. It is also very green because they don't admit anything. Another good thing is they have control of the altitude. Unlike solar where it depends on the weather conditions. From a Cameco perspective, I think it's an interesting stock because it's pure play a large Uranium company. The interesting part about nuclear industry is it has long-term contracts. So utility companies like Cameco, they sign contracts to supply uranium for the next 10, 15 and 20 years and negotiate the price. That's where it becomes really tricky because both sellers and buyers think about supply and demand 10 years out and then sign contracts to lock in that price. So I think things in the nuclear industry and the uranium space movie but slowly over time. But, over the last year or so we have seen a pickup starting to lock in more more of supply because they are getting concerned about what they are seeing 10 years out. >> I think in terms of Hiroshima, I think of Germany, we had governments saying they didn't want it. All these forces now seem to be aligning in favour of nuclear and uranium. But if the politicians running various countries are saying "no" does not become a headwind? >> That's what it looked like a year ago previously. Now things are changing with what's happening in Europe. This natural gas and security of supply. In Germany, they decided to keep the last two reactors running for a while longer just to get through this winter. In France, the Pres. is talking about a potential nuclear renaissance. They might consider building new reactors. In even in Japan, who was impacted the most by Fukushima will have reactors running next year. >> I think we mentioned natural gas. > Not much at the moment. But it will be bigger in the future. So if ever we have LNG Canada on the BC coast, there is opportunity to expand that facility because it's only phase 1. Were talking about potentially improving phase 2 and potentially phase 3 and four. But obviously this is years away. We are not there right now to supply more LNG in the market. There are some companies that are finding other ways to do that. For example Canadian gas producer decided to sign a contract to supply an LNG project on the Gulf Coast of Mexico. So they will be shipping gas all the way from Alberta to the Gulf Coast through an LNG supply company. > All right. Let's talk about the drillers. We have a question coming in here. >> It's interesting because typically, when you think about potential recession and you're not sure what the future brings in terms of economic conditions, drillers and other services would be viewed as very cyclical. As a cyclical part of a cyclical industry. Here, it's a little bit different. We are talking about the whole industry under invested for years. For five years, six years. So what they're doing, they are refurbishing a lot of their existing equipment. When you talk to executives on exploration production side, one of the key concerns for them is "have you secured the best equipment? The best crews?" That seems to be a big focus now. Companies, on the production side, want to make sure they have the equipment and people in place. Unless the well crashes and we have a bad environment, it doesn't look like they're preparing to cut potentially some of those services. In the meantime, the drilling companies are enjoying pretty substantial double-digit price increases when there having their drilling contracts. >> Fascinating stuff as always. Always happy to have you here Andriy. >> Thank you. Andriy Yastreb Energy Analyst at TD Asset Management. That's all the time we have thanks for joining us and we will see you tomorrow. [music]