Late last year, we learned that the Alberta government would be imposing production cuts to help boost the price of oil. With a big delta between the price of Western Canada Select (WCS) and key benchmarks like West Texas Intermediate, Canadian producers weren’t able to cash in on a stronger price of oil. Trading as low as $12/barrel in November, we’ve seen prices of WCS rise back to around $50, as the move looks to have helped, at least for now.
Initially, the cuts were expected to last three months, and we’ve already seen restrictions being eased off earlier this year. And now, the Alberta government is saying that production will increase by 25,000 barrels a day in May and in June as well. However, there’s no timeline of if or when the cuts will be removed. And given the government’s plans, the cuts may stick around.
In the news release, the government said, “This temporary policy has been critical to reducing the oil price differential while we move ahead with our medium-term plan to ship more oil by rail and lead the long-term charge for new pipelines as we fight to get full value for the resources owned by all Albertans.”
By the sounds of that, there doesn’t sound like there’s anything short term about the cuts. However, with an election coming up next month, this could all be moot if there is a change in leadership and strategy.
Why this is good news for oil and gas stocks
Either way you look at it, there’s a reason to be optimistic for a stock like Enbridge (TSX: ENB)(NYSE: ENB) that has struggled over the past few years.
If the price of WCS is able to stay where it is, that’s going to help the industry and encourage a lot more investment. In addition, if the Conservative government returns to power in Alberta, that alone could help drive some bullishness around oil and gas stocks given that would help put more focus on the industry.
The big obstacle for a stock like Enbridge today is the resistance that it has run up against. With a 52-week range of just under $50 a share, investors have been very cautious to keep the stock from rising higher than that level. You have to go back to 2017 for the last time the stock was up over $50 with any degree of regularity. Once Enbridge is able to break through that barrier, the stock could be poised for much more growth.
The problem is that there’s still a lot of risk associated with oil and gas stocks, and rightfully so. With pipelines being cancelled or delayed, this hasn’t been the most conducive environment for growth. However, if investors start seeing some more stability in the industry, then that will certainly change
In the meantime, investors of Enbridge will have to settle for a solid dividend while they wait for a recovery to happen. And with the stock trading at only around 1.6 times its book value, it might not be a bad time to buy and lock in a position today.
