Berkshire raised the stake in 2015, but the regulatory filing for Q3 2016 shows the company changed its mind on Suncor and exited the position.
The news has investors wondering if the sage of Omaha sees more trouble ahead for the Canadian energy sector. Let’s take a look at some of the reasons Buffett might have bailed out.
The 2016 rally in WTI oil from its low below US$30 per barrel to US$50 was primarily driven by market belief that global oil producers were going to come to some form of an agreement to freeze output.
The first wave of optimism petered out in July as reports of record production from Saudi Arabia had the market wondering if all the talk was just a bunch of hot air.
As WTI oil dropped from US$50 toward US$40, OPEC started to get nervous again, and the publicity machine ramped up. At the end of September, OPEC even released a statement saying the group had agreed at its meeting in Algeria to work towards a firm deal at the next meeting on November 30.
Some reports suggested production could be cut by as much as 700,000 barrels per day. The market ate it all up again and pushed oil back above US$50.
In the wake of the statement, the complicated nature of OPEC has become evident.
Iraq wants to be exempt from any cuts, claiming it needs extra funds to fight insurgents. The country is OPEC’s second-largest producer, so any deal without Iraq is going to be much less effective.
Iran also wants to be exempt as it continues to ramp up output after the lifting of sanctions.
This would leave Saudi Arabia to carry most of the burden to reduce production enough to force a meaningful and sustainable hike in prices.
Saudi Arabia and Iran are supporting opposite sides of the war in Yemen, so it is unlikely the Saudis are going to cut their own throats to support their enemies.
A deal might be announced at the OPEC meeting on November 30 to avoid a plunge in the oil market, but many pundits have little faith any agreement will be honoured.
So, lower prices might be the norm for longer.
Canadian oil companies are still waiting for a major pipeline to be built to connect Alberta to the coast, so they can get international prices for their product.
Energy East and Northern Gateway are stuck in the mud, or even dead, depending on who you talk to on the matter. Keystone XL could be back on the table under a Trump administration, but that is not guaranteed, and it is unlikely the project would get the green light on favourable terms for Canadian producers.
Without access to foreign markets, Canadian oil remains at risk of being trapped as the U.S. now has enough of its own oil that it might not need any Canadian supply in the future.
Long-term oil demand
Buffett makes bets for decades, and he might be looking at the evolution of green energy and thinking Suncor is already past its prime.
Electric cars are now a reality, and the day when most vehicles on the road no longer run on gasoline could arrive faster than many people expect.
In that world, demand for fossil fuels could plummet, and that isn’t good for Suncor’s oil sands operations or its gas stations.
What should investors do?
Buffett isn’t always right when it comes to investment decisions, and he might even regret dumping Suncor, which is currently trading close to its two-year high on optimism OPEC will actually get a deal done and Keystone will see the light of day.
What’s the bottom line?
If you believe oil has a future, Suncor should be on your radar, and the Canadian oil industry could prove to be a great opportunity right now for contrarian investors.
If you think no new major pipeline will be built and are convinced the world is going to get serious about abandoning fossil fuels, it might be best to look for other opportunities.