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“We see positive performance ahead, so we would expect it to bring in future inflows,” Nuttall said.

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With third-quarter results just days away, and share prices hinging on the numbers, Nuttall expects Canada’s oil producers to post mouth-watering results.

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“I think their free cash flow generation is going to blow people’s minds,” he said. “Some of the companies we own are approaching debt-free status next year which is incredible.”

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As a result, the sector is going to have to deal with a different kind of problem.

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“They’re generating so much cash, they literally do not know what to do with it,” Nuttall said. “Those are the conversations we’re now having with management teams: as you approach debt-free status, how do you balance shareholder returns with organic growth?”

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That balance is starting to tilt toward growth. “The expected royalty changes in Alberta this November should push it further by favouring investment in production over share buybacks,” Nuttall said.

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Most portfolio managers McCrea has talked to are electrified with the sector’s remarkable run over the past year, especially in recent months, and say elevated oil prices are only part of the story.

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As investors increasingly question whether high-flying tech and software companies can generate acceptable returns on massive AI investments, portfolio managers are rotating more of their funds into old economy safe havens such as oil and gas.

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McCrea hears investors describe Canadian energy as a HALO trade. It’s an investment strategy that shifts capital away from software stocks, which don’t have much in the way of physical assets, into companies featuring heavy assets at low risk of becoming obsolete, hence the acronym.

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Technology stocks now make up a larger share of the U.S. S&P 500 than they did at the height of the dot-com bubble. Information technology accounts for close to 40 per cent of the index, according to S&P Dow Jones Indices, compared with about 35 per cent in 2000.

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And if Alphabet Inc., Meta Platforms Inc., Amazon.com Inc. and Tesla Inc. are counted as tech, which, oddly, they are not, the share rises further. Goldman Sachs Group Inc. estimates that AI-linked stocks alone account for close to 45 per cent of the S&P 500, an index that covers the largest publicly traded companies in the U.S.

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“Investors are growing more comfortable with energy’s outlook,” McCrea said. “With the sector seen as less risky, more are moving in for the returns and diversification.”

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Nuttall said both foreign private equity and conventional buy-and-hold funds are showing renewed interest in Canada, drawn by its plentiful resources and longer reserve life compared to the United States.

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“Everyone’s always known that Canada has been blessed with an abundance of resource. So when you couple the end of the narrative around the energy transition with a federal government now supportive of the industry, the impediments to the return of major fund flows into Canada are eliminated.”

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Still, Nuttall says risks remain. Record-high diesel prices threaten a new round of high inflation, which could cut demand for oil. And, among other challenges, high prices could encourage more production worldwide, creating a risk of oversupply.

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“That said, we think the overall attractiveness of the Canadian energy is extremely high.”

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