The Canadian oil sands have long carried a bad reputation for being one of the nation’s “dirtiest” industries. Indeed, the segment does emit a large amount of greenhouse gas (GHG) emissions in the context of Canada’s total emissions—around 12%, at 81 megatonnes per annum (Mtpa) out of Canada’s total 672 Mtpa of GHG emissions in 2020.
This has resulted in many ESG-conscious investors looking to allocate their capital in more environmentally-friendly ways to omit the oil sands from their investment portfolios. This trend has taken hold across pension funds, mutual funds and ETFs alike.
Introducing the Pathways Alliance
The Pathways Alliance consists of six companies that currently comprise ~95% of the oil sands' total production. They have banded together with the shared goal of achieving net zero emissions by 2050.
These six companies include:
- Canadian Natural Resources (TSX:CNQ)
- Suncor Energy (TSX:SU)
- Cenovus Energy (TSX:CVE)
- Imperial Oil (TSX:IMO)
- ConocoPhillips (NYSE:COP) Canada
- MEG Energy (TSX:MEG)
The companies aim to accomplish their net zero goal through three phases, anchored by a mega carbon capture, utilization & storage project which will store captured carbon in a reservoir by Cold Lake, Alberta.
Why go net zero?
It is widely recognized that the world is moving away from fossil fuel reliance with the adoption of alternative energy sources (solar, wind, hydro, nuclear etc.) and electric vehicles. However, it is equally evident that this process will take time and that much of the developing world, in particular China and India, will still require fossil fuels to support their growing economies.
This move by the oil sands operators shows that they are committed to “cleaning up” their operations for the benefit of the environment. This will also help Canada to achieve its country-wide net-zero GHG emission target by 2050.
Investment implications
What does this mean for investors? If the key operators of the Pathways Alliance succeed in their endeavor they will be well placed to support the North American economy with their stable, long reserve life production base.
Furthermore (and more importantly), the Canadian oil & gas sector will become more investable by ESG investors who wish to structure their portfolio while remaining cognizant of environmental factors.
ETFs to gain exposure to the Canadian energy space
While the overall oil & gas sector rallied in 2022 due to strong commodity prices, the sector still remains attractive as companies are de-leveraged. The long-term attractiveness of the oil sands in particular may be heightened with decarbonizing plans in motion from Pathways.
To gain exposure to the Canadian oil & gas sector, Canadian investors can use the following ETFs:
iShares S&P/TSX Capped Energy Index ETF (XEG)
The most diversified Canadian Energy play, XEG gives exposure to the broad Canadian Energy space, holding companies within the S&P/TSX Energy sector—with a tilt towards the aforementioned oil sands’ producers.
- AUM: $2.0 billion
- Expense Ratio: 0.61%
- 1Mo Performance: +5.1%
Horizons BetaPro S&P/TSX Capped Energy 2x Daily Bull ETF (HEU)
For those looking for enhanced yield in the short term, HEU is a riskier play. This ETF essentially replicates the exposure of XEG, but at 2x the daily return profile. Beware that leveraged ETFs are not meant for long holding periods.
- AUM: $63 million
- Expense Ratio: 1.64%
- 1Mo Performance: +9.2%
Data as of February 10, 2023.
This content was originally published by our partners at the Canadian ETF Marketplace.