Canada’s Pipeline Crisis Isn’t All Bad For Investors

Canadian oil producers have been having a hard time after the 2014 crisis, harder than their peers elsewhere, constrained in their recovery and growth plans by a shortage of oil export capacity. However, in evidence of silver linings, they are now focusing on paying down debt and buying back shares issued at the height of the crisis as a survival measure that was very popular in the oil industry.

Reuters reports that an obligatory production cut has seen local producers accumulate cash they can’t use to boost output growth so they are using it to cut down debt. The previous Alberta government instituted the OPEC-style production cut last December in a bid to prop up historically low prices of Canadian crude brought about by that same pipeline shortage that is still plaguing the industry with no resolution in sight.

This year, cash flow in Canada’s oil industry is seen to hit US$39.1 billion (C$52.7 billion), according to Jackie Forrest, at ARC Financial. Last month, BMO analysts told Bloomberg, “The surge in crude oil prices is creating a cash flow windfall for many companies. At a WTI price of $55/bbl and WTI-WCS differential of $20/bbl, we expect the Canadian large cap companies to collectively generate C$11 billion of surplus cash flow in 2019.”

WTI has been trading higher than US$55 a barrel and is likely to remain where it is for a while longer bar any sudden surges in production. Although Canadian crude doesn’t follow suit with price movements of the U.S. benchmark, the current discount of Western Canadian Select to West Texas Intermediate is less than US$20 a barrel. Indeed, in a more recent comment to Reuters, BMO analyst Randy Ollenberg said large Canadian oil producers could see their cash piles rise to US$9.7 billion (C$13 billion).

In this environment it’s only to be expected that producers would not even make any growth plans.

“There is no sense spending money to generate additional production and drive further throughput if you can’t produce the oil. The economics of that are zero,” said Suncor’s chief executive during a recent earnings call. Suncor, by the way, was against the cuts unlike sector players. The producer is an integrated company, which means its refining business benefits from cheaper local oil.

“There’s no point growing with the Alberta production curtailment in place and the lack of egress opportunities,” Meg Energy’s CEO told Reuters echoing an identical sentiment.

So, has the NDP government that surrendered power to the Conservatives in last month’s election Alberta did a favor in disguise to local oil producers? That may well be the case. With cash flow at a five-year high and no way of using it to get more barrels out of the ground, Canadian producers are forced to improve other aspects of their performance, which would ultimately earn them shareholder trust.

A drawback in this blessing in disguise of sorts is the fact that asset sale deals have dwindled in number. However, this could be temporary if the next Canadian federal government turns out to be more investment friendly and energy industry-friendly, which based on what we have seen in Alberta is not impossible. In the meantime, the industry is blaming the current federal and the previous provincial governments for the situation it is in and buying back stock for lack of anything better to do.

By Irina Slav for Oilprice.com