Will Alberta’s Production Cuts Help Oil and Gas Stocks?

Cenovus Energy Inc (TSX:CVE)(NYSE:CVE) stock has started taking off and could be a great buy today.

| More on:
Oil pipes in an oil field

Image source: Getty Images.

Alberta Premier Rachel Notley made headlines recently when she announced that the government would be scaling back on oil and gas production in an effort to boost struggling oil prices.

The cuts won’t be effective until January and will result in 325,000 fewer barrels of oil per day, or just less than 9% of the province’s total production. However, the province expects the sharp reduction to last for only three months, when it expects that the big gap between supply and demand will shrink, at which point it will reduce the amount of the cuts to just 95,000 barrels.

But haven’t oil and gas prices been rising?

While it’s true that crude oil prices have been higher for much of the year, the problem is that Western Canada Select (WCS) has been trading at a big discount, which is why Canadian producers have still been struggling.

WCS has been trading north of $30 a barrel for much of the year, but fell below that in October, and in late November it dropped below even $12. Since the cuts were announced by the Premier, we’ve seen WCS bounce back, rising up to nearly $30 again.

We’ve seen production cuts take place in the global markets, but this has not been typical for WCS.

The Premier showed a great deal of concern for the current conditions, stating, “We must act immediately, and we must do it together. I can’t promise the coming weeks and months will be easy, but I can promise we will never back down in our fight to protect jobs and the resources owned by all Albertans.”

The move underscores another significant concern: the loss of potential jobs in the industry as a result of less production. However, with the cuts expected to go no longer than a year, the risk should be contained, but it’s still a sensitive issue in a province that is still struggling to recover from the latest downturn.

Positive reaction from the markets

Cenovus Energy Inc (TSX:CVE)(NYSE:CVE) saw its share price jump by more than 15% over the past five days as the news gave the company renewed hope that things may be a bit brighter in the months ahead.

The stock has struggled, hitting all-time lows recently and it’s been hard to justify investing in the company with the outlook on the industry being so bearish. How strong of an impact the cuts will have on the stock remains to be seen, but Cenovus CEO Alex Pourbaix was very happy with the news.

In an interview with BNN, Pourbaix stated, “If the government had not stepped in, not only would Cenovus have massively cut back its winter program, but that would have had knock-on effects to the communities we work in, the contractors that we use.”

With Cenovus still trading at a fairly low price and still well below book value, it might be a great buy for investors looking for a stock with a lot of upside. If the production cuts prove to keep WCS prices higher, that will be good news for Cenovus and its peers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

More on Energy Stocks

The sun sets behind a high voltage telecom tower.
Energy Stocks

2 Utilities Stocks With Sought-After Stability

Here's why Fortis and Hydro One are two top utilities stocks long-term investors may want to consider right now.

Read more »

Choose a path
Energy Stocks

Algonquin Power Stock: A Smart Investment or a Value Trap?

Does APQ stock have more surprises for investors like last year?

Read more »

Oil pumps against sunset
Energy Stocks

Canadian Energy Stocks: Here’s Your Best Bet in February 2023

Want to bet on energy stocks in 2023? Try this Canadian stock for solid income and growth.

Read more »

a person watches a downward arrow crash through the floor
Energy Stocks

Why ARC Resources Stock Plunged 17% in January 2023

Should you buy ARC Resources stock now?

Read more »

oil tank at night
Energy Stocks

Is CNQ Stock a Buy in February 2023?

Canadian Natural Resources stock has many things going for it, including its strong dividend history, as well as cash flow…

Read more »

tsx today
Energy Stocks

TSX Today: What to Watch for in Stocks on Thursday, February 2

More corporate earnings reports could give further direction to TSX stocks today.

Read more »

oil and gas pipeline
Energy Stocks

Better Buy: Suncor Stock or Enbridge?

Amid the favourable environment, would you be better off investing in ENB or SU energy stock right now?

Read more »

Electric car being charged
Energy Stocks

Your Play to Get in on the 2023 EV Boom

Here's why Magna International may be the best way for Canadian investors to ride the EV boom.

Read more »