It seems Canada’s top oil producers have no way out of the mess created by the shortage of pipeline capacity.
Calgary-based Cenovus Energy Inc. (TSX: CVE)(NYSE: CVE) said yesterday that the pipeline bottlenecks have now started to slow down its production. In a statement released on March 22, Cenovus said its Christina Lake and Foster Creek complexes have operated at reduced levels since February.
The news sent its shares tumbling more than 6%, with other top oil sands producers, including Canadian Natural Resources Limited (TSX: CNQ)(NYSE: CNQ) and Suncor Energy Inc. (TSX: SU)(NYSE: SU), also feeling the heat.
With producers struggling to bring their products to the market, Canadian heavy crude was selling at close to the highest discount in four years when compared to the U.S. benchmark oil futures.
“We’re taking steps to respond to a critical shortage of export pipeline capacity in western Canada that is beyond our control and is having a negative impact on our industry and the broader Canadian economy,” Cenovus CEO Alexander Pourbaix said in the statement. The problems “clearly demonstrate the urgent need for approved pipeline projects in Canada to proceed as soon as possible.”
But there is no quick fix to these constraints, as delays continue for all three major proposed oil pipelines to export more oil from western Canada, including Kinder Morgan’s Trans Mountain expansion, Enbridge’s Line 3 replacement, and TransCanada’s Keystone XL.
Western Canadian crude production exceeded the pipeline capacity to ship it to markets by 87,000 barrels a day in December, industry researcher Genscape Inc. said in a report last year. That may rise to 338,000 barrels a day by the end of 2018.
Shares plunging
In this dismal situation, Canada’s top oil stocks are tanking, despite the fact that crude oil prices have strengthened to $60-65 a barrel. So far this year, Suncor stock has lost 10%, and Canadian Natural Resources has lost more than 13%, underperforming the broader market.
Industry analysts predict that the situation may improve once the Canadian rail networks start adding more capacity for companies are able to ship energy products through rail. But that relief may take at least a year to come.
This temporary setback for oil companies, however, shouldn’t discourage long-term investors. Suncor, Canada’s largest oil sands producer, is still a great long-term bet with its very attractive upstream and downstream assets.
Similarly, Canadian Natural Resources is also a solid candidate for oil bulls to benefit from the company’s dominant position in the sector after its acquisition of oil sands assets from Royal Dutch Shell — a move which is likely provide a great boost to its cash flows as oil prices recover.
The bottom line
There is no quick fix to Canada’s pipeline bottlenecks. This situation will likely keep top oil stocks depressed in the near future. Investors should look for attractive entry points to buy Suncor and Canadian Natural Resources. These stocks will lead the recovery in oil stocks when the situation normalizes.
