Hopeful Signs Fuel a Quiet Rebound in Canadian Oil and Gas Industry Stocks
Investors
are unearthing value in a most unfamiliar place: the Canadian oil industry.
Yes,
that industry, its prospects long shrouded in political and regulatory
fog, endless struggles to add export capacity and weak domestic prices for its
products.
Interest
looks to be returning, albeit gingerly, after a long period in which major
institutional investors in Canada and abroad took a pass.
In
the meantime, Wall Street has tightened its purse strings on U.S. shale-oil
producers, which Canada’s energy sector has watched with envy as they drilled
up a storm and became major rival exporters.
Canada’s
energy problems have not vanished, not by a long shot, but several factors are
combining to lure value hunters. They include improved commodity prices and a
recognition that many companies are operating with such lean financial
structures after five years of downturn that they stand to profit handsomely
from any improvement.
In
the past year, oil and gas companies on the Toronto Stock Exchange have climbed
16 per cent, and momentum has picked up in the past two months. The S&P/TSX
Capped Energy Index has easily outpaced the U.S. energy-company index, which is
down 1.7 per cent on the year.
Some
of the big gainers since late October include ARC Resources Ltd., up 45 per
cent; Whitecap Resources Ltd., up 44 per cent; Tourmaline Oil Corp., up 32 per cent;
and Canadian Natural Resources Ltd., up 23 per cent.
Nearly
all of the companies have logged their increases despite a dearth of deal
making in the forms of mergers, acquisitions and raising capital. This has been
the sector’s lot for at least two years. Producers that made large acquisitions
were punished by investors. There has been precious little appetite for new
equity to finance expansion in an uncertain market.
The
exception to the stick-to-your-knitting rule is Tourmaline. Investors have responded
enthusiastically to its move to spin off assets into a royalty and energy
infrastructure company worth $775-million, with plans to take it public.
Of
course, stocks in many cases are still selling for less than half what they
were before the oil price crash in early 2014. But now, with oil and gas prices
edging up, companies are set to take advantage of the cost-cutting and
debt-reduction they had been forced to undertake to survive. Production costs
are well below what they were five years ago.
U.S.
benchmark crude oil is up 10 per cent in the past two months, partly on
expectations that the global economy will benefit from what appears to be an
end to the U.S.-China trade war.
Western
Canadian Select heavy oil has maintained a relatively healthy price
differential to West Texas Intermediate, and sold this week for US$39.05 a
barrel, according to NE2 Group, compared with an average of US$25.66 in the
fourth quarter of 2018.
Canadian
natural gas has held at more than $2 a gigajoule after a summer when its value
fell to zero at times because of tight pipeline capacity.
Longer
term, the country’s pipeline tangle may be loosening with the Trans Mountain
pipeline expansion between Alberta and the Pacific Coast now under
construction. To be sure, there remains an appeal by Indigenous groups before
the court that could stall the project yet again.
There
is also the chance that Enbridge’s stalled Line 3 pipeline replacement could be
moving toward completion after a recent positive environmental assessment by
the Minnesota Department of Commerce. The regulatory process is still under
way, but a go-ahead would vastly expand space to send Canada’s crude to the key
U.S. Midwest market.
All
of this is happening as U.S. producers, which had been stock-market darlings,
deal with a massive drop in investment capital as oil-field production
performance slips. The sector raised US$1.3-billion in share offerings this
year, its lowest since 2006, Bloomberg reported.
Goldman
Sachs said in a recent report that shale oil production, which has lifted the
United States to top spot among global oil producers, could slow down
considerably in coming years as well productivity declines
With its balance sheets tailored for tough times and production relatively stable and predictable, the Canadian oil patch could well be the beneficiary of some of that energy investment seeking new targets.