Keystone XL and Dakota Access are back in play. Could this be a boon to the Canadian energy sector? Thomas George, Portfolio Manager, TD Asset Management, speaks with Kim Parlee about what Canadians can expect in both the oil and commodity space.
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00:00:05.300 With a stroke of a pen, President Trump signed
00:00:07.670 executive orders that breathed new life into the Dakota Access and Keystone XL project.
00:00:12.816 So what does this mean for TransCanada, and could this be the beginning of a boon
00:00:16.190 to the Canadian pipeline, the energy sector?
00:00:18.023 If you could sort it all out-- and that is no small task.
00:00:21.210 Thomas George, Portfolio Manager of the TD Resource Fund and TD Precious Metals Fund,
00:00:25.060 how are you?
00:00:25.670 All good.
00:00:26.210 Thank you.
00:00:26.875 You're welcome.
00:00:27.500 Happy new year.
00:00:27.890 Happy new year.
00:00:28.490 I know it's a bit late.
00:00:29.130 I just, I was thinking, I was telling this to David, it's so hard for, I think,
00:00:32.630 even for a lot of people to kind of sort through what's going on.
00:00:35.338 But for you guys, there's been a lot going on.
00:00:38.354 So I have a two-part conversation.
00:00:39.770 I want to do the first part.
00:00:40.850 I want to talk about pipelines and what it means for Canada.
00:00:43.230 And then we're just going to take it very meta in the second part.
00:00:45.770 We'll talk about commodity prices and what you see.
00:00:47.630 And I would say that latter part will be more--
00:00:49.588 like that, that's where there's far more iterations, far more--
00:00:53.510 OK, we're going to make them wait for that.
00:00:55.301 So let's talk a bit about that Keystone--
00:00:58.820 on again, off again, on again, but with conditions, an asterisk.
00:01:02.640 Yeah, like a big kind of a Trump tweeting condition,
00:01:05.810 which is like, you just laugh, like ah?
00:01:08.640 But no, you know, I think all positive.
00:01:11.280 And net-net-net, you know, we're coming back from a phase in the not
00:01:14.210 that long ago where we were just like, we are in a trapped geographical jurisdiction.
00:01:19.460 We can't get this stuff out.
00:01:20.960 And our crude is selling at a deep discount to the global benchmarks.
00:01:24.980 And that was a bad thing.
00:01:26.690 The good thing about this is, in fact, once you add Keystone XL to the mix,
00:01:31.730 on top of what Trudeau has already said, let's--
00:01:34.636 We had no pipelines, and then we've got them--.
00:01:37.010 Now we've got an abundance.
00:01:38.135 And you know what, excess is OK.
00:01:40.760 Net-net, all of this is very positive.
00:01:43.520 Is there any kind of-- the one thing that people are focused on
00:01:46.370 is, they're going to renegotiate the terms of the agreement.
00:01:49.160 Now I know this is-- this is going to affect Canadian companies in the short term.
00:01:53.330 But again, net-net, this is a very positive thing.
00:01:56.180 You may not get the immediate work, but the sector will benefit overall.
00:02:00.200 Yeah, all things balanced, I would say, for us to have a market for our product,
00:02:07.430 with caveats--
00:02:08.960 which is kind of what Trump has presented--
00:02:12.057 Is better than none.
00:02:12.890 Is better than none.
00:02:13.723 So I think we'll take it.
00:02:16.520 So needless to say, in Trump's grandiose way, as masterful negotiator, economic rents
00:02:23.210 will start to come to him.
00:02:26.786 It's kind of like when my kids play, like my son, seven years older.
00:02:31.556 He always gets the economic rent.
00:02:32.930 He's the big brother, right?
00:02:35.210 And that's the kind of-- and frankly, we need it.
00:02:38.220 So, whatever, we'll agree.
00:02:40.850 What about the idea of having a tariff on Canadian oil?
00:02:44.660 Yeah, so this--
00:02:46.670 I thought the chart that was presented earlier was very good.
00:02:50.350 We're balanced in trade with the US.
00:02:52.000 So all things equal--
00:02:53.160 And they're using us as an example of how trade should work.
00:02:56.930 So hopefully-- we had Steve Schwarzman here, preaching, saying don't worry about Canada.
00:03:03.140 But the problem is, everything Trump does is very rapid gun, machine fire, you know,
00:03:10.280 140 characters kind of thing.
00:03:12.080 So what we really need is certainty.
00:03:14.110 And that's what the market's lacking here.
00:03:15.860 But the fact that he stated that he wants his pound of flesh from the pipelines
00:03:20.240 leads me to believe, let's not just say things
00:03:23.510 are going to be phenomenal just because.
00:03:26.540 You know, I think the inauguration speech was something-- that was something very clear.
00:03:32.000 Buy America, hire America, live America-- you know,
00:03:35.510 it's going to be RV culture left, right, and center.
00:03:38.390 This was a very clear shot across the bow to anything global trade.
00:03:43.121 We promised now to talk about commodities.
00:03:44.870 And again, with all this-- and we talked with David
00:03:47.250 about this as well-- infrastructure push.
00:03:49.171 And we're seeing a lot of the cyclicals move up.
00:03:51.170 We're seeing a lot of the raw materials go up as well.
00:03:53.779 Oh, for sure.
00:03:54.320 Can you frame for me in this new world order--
00:03:58.010 it really is--
00:03:58.760 Yeah, yeah, yeah, it is.
00:03:59.780 --Just generally speaking, who are the winners, and who are the losers?
00:04:03.240 So I think at a very high level, if you had to distill
00:04:06.590 what is Trump saying, there's a couple of things where he's saying,
00:04:09.770 trade deals were all bad--
00:04:11.090 one element.
00:04:11.990 And another thing is, let's make infrastructure great again.
00:04:14.765 So let me tackle the let's make infrastructure great again.
00:04:17.500 There is really-- if you pull back the numbers,
00:04:19.519 there's a real strong case, at the infrastructure level.
00:04:22.760 So government spending right now for infrastructure, roads,
00:04:27.200 government infrastructure, is at 0.1% of US GDP.
00:04:32.720 That's the lowest level since 1947.
00:04:36.140 And it was as high as 0.6%, 0.7%, 0.8% of GDP.
00:04:41.370 So we're talking five-- it could easily double.
00:04:44.180 It could easily triple.
00:04:45.320 So there's a real push here for infrastructure spending.
00:04:48.542 And when you kind of distill that, what we think simply-- and he's just
00:04:51.500 said, and we don't want to trade with the world.
00:04:53.810 And he said about Keystone XL.
00:04:56.600 Let's use American pipes.
00:04:58.590 So what that means is American steel.
00:05:00.380 So when we think about it, it's just, who benefits, within the US border,
00:05:06.290 And the clear winner is steel.
00:05:09.500 American-made steel will be a winner.
00:05:11.570 But more broadly than that, broad commodities should win in this
00:05:15.740 as well, because this could be a very significant step up
00:05:18.980 in infrastructure spending.
00:05:20.367 So basically even the raw material makers have to bring in the commodities
00:05:23.450 to do what they need to do.
00:05:25.010 And at the very core of it, we're talking about a US economy that's
00:05:28.580 basically at near-- like you know, there's an element of full employment already.
00:05:32.090 And wages, we're already seeing wage inflation.
00:05:35.150 So you're adding real kindle here to a well-running economy already.
00:05:40.610 So the other part of that is inflation.
00:05:42.680 And when you say, well, and we don't want to trade with other partners that
00:05:47.060 have goods that keep inflation down with America,
00:05:50.060 now you're talking about making those toys that used to be made in China in America,
00:05:53.720 Billy's not going to get the same toy.
00:05:55.866 It's going to be a little--
00:05:56.990 And he wants toys, trust me.
00:05:58.460 Yeah, exactly.
00:06:00.300 So it's going to be interesting, to say the least.
00:06:02.800 And I think it's going to be inflationary.
00:06:04.550 And that really brings us to our last thesis--
00:06:07.490 that within America, just specifically thinking about this region,
00:06:12.530 you're talking about a dynamic that's really going to add a whole wall of money
00:06:19.200 to an already well-running economy.
00:06:21.696 So we're talking inflation.
00:06:22.820 We're talking gold becomes another hedge again.
00:06:25.130 So gold an interesting one where, in a deflationary period,
00:06:27.830 we just saw that last year with negative yields.
00:06:29.870 Gold has value.
00:06:30.920 Then you get into this Goldilocks phase where gold has almost like-- people are like,
00:06:34.644 well I just want to invest in the stock market
00:06:36.560 and I don't care about inflation because it's not running too hot or too cold.
00:06:39.810 But then immediately we can move into a world where inflation just runs out of control.
00:06:43.930 And Trump strikes me as one of those guys.
00:06:46.230 He's not a fine tuner.
00:06:47.530 It's just a loud, bang it out.
00:06:50.670 And so that's kind of--
00:06:52.040 so my thinking is that he runs his own ego, will inevitably
00:06:57.830 lead him to run this economy way too hot, which
00:07:00.800 will be like-- it will be good for America, be good for jobs.
00:07:03.930 But there will be a price to be paid on the inflation side.
00:07:07.250 OK, so let's talk a bit about, again, for someone who's looking,
00:07:10.600 let's say, OK, I get it, what are some ideas to actually buy?
00:07:16.440 So what do you guys like?
00:07:17.629 So if I had to say, how should you think about this-- and there's a lot of iterations
00:07:21.932 And I really want to stress that, because any one of these things that we're stating here
00:07:25.640 can easily be thrown off, depending on how he thinks about border adjustment taxes,
00:07:31.010 whether he chooses to go after China.
00:07:32.990 This is a very, very interesting outlook.
00:07:36.380 But at a very high level, I would say stay close to US infrastructure.
00:07:40.460 What that means is engineering construction, all good.
00:07:43.500 When you think about US steel, all good.
00:07:46.310 Copper will go into these projects as well.
00:07:49.539 Those are all good.
00:07:50.330 Now the caveat, huge caveat, is no trade war with China.
00:07:54.290 So US steel should still be OK.
00:07:56.314 But if you go trade war with China, China's a big consumer
00:07:58.730 of copper, big consumer of iron ore.
00:08:00.810 That can push everything down.
00:08:01.270 That can push everything down.
00:08:02.519 So a lot of this is a bit of a tango, depending
00:08:05.360 on how much he wants to push the real trade barriers.
00:08:10.130 And Detour Gold is a name I think you liked as well.
00:08:12.300 Yeah, sure.
00:08:12.800 So Detour Gold for us--
00:08:14.430 so two names that we like.
00:08:16.439 I'll start with the gold.
00:08:17.480 Let's call that the hedge or the insurance, Detour Gold.
00:08:22.680 It's a Canadian-based gold mine, 25 years of life of mine.
00:08:28.195 This, in our view, is one of the best plays to get real long-term exposure
00:08:33.500 to a good hedge.
00:08:35.145 You know what, I am just going to leave it and say, I think the whole China discussion,
00:08:39.110 I'm just going to park and have you back and we can talk about that.
00:08:41.450 Yeah, I'd love to.
00:08:41.780 And again, when we know something, because right now we don't know.
00:08:44.300 That's all--
00:08:45.350 Thomas, thank you.
00:08:45.970 Thank you very much.
00:08:46.803 Thomas George, portfolio manager of the TD Resource Fund and portfolio
00:08:50.300 manager at the TD Precious Metals Fund.
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