Equity markets fell for a third straight month in October with the TSX Composite returning -5.1% in British Pounds. U.S. 10-year treasury yields continued to rise, finishing the month at 4.93% and briefly exceeding 5%. Bond yields were relatively flat in Canada with the 10-year finishing the month at 4.05% — half a percent below U.K. 10-Year Gilts.
The Bank of Canada (BoC) held the Overnight Lending Rate at 5% for a second consecutive meeting on 25 October. In light of moderating inflation, there’s a growing consensus that the recent cycle of interest rate hikes is over. Seven of the CPI’s eight components moderated from August, with food prices being the only exception. The widespread moderation in inflation is also evident in the core inflation measures used by the BoC, which rose at their lowest pace in 31 months. Conversely, U.K. inflation in September was higher than expected amidst rising oil prices with core inflation remaining above 6%. While the September inflation data takes pressure off the BoC to enact further rate increases, other central banks may need to continue tightening until inflation moderates further. As of early November, the bond market is pricing just a 4% chance of a rate hike at the BoC’s next meeting on 6 December.
In a regulatory win for Canadian infrastructure projects, the Supreme Court of Canada ruled in October that the Federal Government’s Impact Assessment Act (IIA) is unconstitutional. Enacted in 2019, the controversial bill would allow federal regulators to consider environmental and social impacts in approving various resource and infrastructure projects throughout the country. Critics of the bill argue it creates uncertainty, could drive away investment and delay major infrastructure developments. Moreover, as evidenced by the Pathways Alliance, which is seeking to capture and store up to 12 million tonnes of carbon dioxide emissions from Canadian oil sands operations by 2030, Canadian energy companies are already well ahead of their global peers in extracting oil and gas responsibly and sustainably. We are hopeful that the elimination of the IIA will accelerate the completion of new and existing energy infrastructure projects. The Trans Mountain pipeline expansion project is set to begin transporting an additional 590,000 bbl/d for export in early 2024 and LNG Canada is expected to add 1.8MMBtu of LNG export capacity in 2025.
October was an exciting month in the energy sector from an M&A perspective. In the US, two blockbuster deals were announced by oil majors Exxon and Chevron, worth over $110 billion in aggregate. In Canada, Tourmaline, one of the Fund’s top 10 holdings, announced the acquisition of Bonavista Energy Corp. in a deal worth $1.45 billion. We believe Bonavista’s assets are a good strategic fit for Tourmaline’s deep basin position and come with a lower decline rate than Tourmaline’s existing production. The purchase price, which equates to just 3.2x cash flow, screens as highly accretive relative to Tourmaline’s pre-deal metrics of 6.4x cash flow. The Tourmaline acquisition comes weeks after Peyto, another portfolio holding, announced the acquisition of Repsol’s Canadian assets for $470 million. The deal was also highly accretive and deepens the company’s inventory and scale.
Energy producers surpassed real estate to become the Fund’s top sector weighting in October. We are encouraged by the recent deal announcements which have lifted investor enthusiasm in the sector. Both Tourmaline and Peyto, which generated returns of 8.8% and 7.5% this month, are leading natural gas companies focused on cost control and maximizing shareholder returns. Canadian energy companies are experiencing a unique period in their history with record distributable free cash flow that is being channeled towards dividends, buybacks, and more recently, accretive acquisitions. At current commodity prices, we remain bullish on the total return outlooks for select Canadian energy companies.