The Natural Resources group covers companies involved in the exploration and production, transport and storage, and refining and selling of various natural resources, referred to as the upstream, midstream, and downstream respectively. This includes the massive oil and gas exploration and production segment which pulled in upwards of $4 trillion USD annual revenue before the most recent downturn. The group also covers integrated supermajors which are companies that operate in the upstream, midstream, and downstream of their industry.

This sector holds some of the largest multibillion dollar public companies in the world, including;

  • Integrated Supermajors: ExxonMobil (XOM), British Petroleum (BP), Cenovus Energy (CVE)
  • Upstream Oil & Gas: Canadian Natural Resources (CNQ), Chesapeake Energy (CHK)
  • Midstream: Kinder Morgan (KMI), Pembina Pipeline (PPL)

Sector Themes


In the period from 2010 to 2014, while oil prices soared in the $90-110/bbl range, the oil and gas exploration and production (E&P) industry enjoyed a 8.3% compound annualized growth rate (CAGR), becoming a $4 trillion annual revenue behemoth. This period of growth was ushered in by the post-2008 financial crisis recovery, during which global O&G demand grew rapidly, especially among the largest consumers (US and China). The US government had been worried of the country’s dependence on imported O&G since sharp price spikes in the 1970s led to inflation and recession. This time around, it seemed that the US energy revolution, led by the shale boom, had come to the rescue. As demand and prices grew, unconventional extraction methods (horizontal drilling and hydraulic fracturing), such as those used in shale plays, became increasingly prominent. High prices allowed shale plays to have economically viable netbacks despite their relatively high break-even points. This allowed the US to become the largest oil producing country in the world at 12.5 mbbl/d, and satisfy 80% of energy needs with domestic O&G.

The decline began when supply started to outstrip demand. The shale boom stimulated a significant amount of O&G supply growth, to a point where both demand and refining capacity were exceeded. This put downward pressure on prices. Initially, OPEC chose to play proverbial hardball by refusing to scale down their production (at the expense of their market share) and maintained their ~30.5 mbbl/d level. As prices continued to fall, and as OPEC production increased to more than ~32 mbbl/d towards the end of 2015, OPEC chose to remove any limit on production, essentially allowing each member to choose any level they wanted. The latest blow has been the nuclear weapons deal reached with Iran; with international trade sanctions lifted Iran will be immediately adding ~1 mbbl/d to the market. No signs of co-operation between the US, OPEC, and Russia (three largest producers) have emerged, and thus the supply glut continues.


Our group remains cautious going forward. O&G prices will likely remain volatile as the global economy works through the supply glut. There are no indications of an upturn in the near term; most commodity markets including O&G remain in contango. OPEC seems set on their current status quo, and nor Russia or the US are in any state to co-operate with each other at the moment. China is still under looming credit issues, and their stock market where up to 80% of all equities are owned by individuals, remains weak. The global economy is continuing to struggle (in part due to depressed commodities), and growth indicators in the US are tepid at best; there does not seem to be any clear indication of increasing demand in the near term. Perhaps the only positive trend from 2015 is that US shale production has finally begun to slightly taper according to the US EIA.

Certain segments of the O&G value chain will perform differently going forward, assuming continued low prices. As they have so far, downstream players will thrive as crack spreads either remain wide or even widen. Midstream companies will perform moderately, given that demand and stockpiles remain steady across all regions. Upstream players will continue to see massive slashes to earnings, smaller companies will continue to be absorbed by integrated supermajors, and supermajors have already begun merging themselves. Expect more capex, dividends, and jobs cuts.