Several notable value investors have been scooping up shares of Canadian oil stocks following the devastating bear market that began late last year. Warren Buffett, for example, purchased 10.8 million shares of Suncor Energy (TSX:SU)(NYSE:SU) at multi-year lows.
After months of terrible news, investors are hoping that these purchases could indicate a market bottom. Reuters published that Buffett’s interest alone “could revive investor interest in the languishing Canadian energy sector.”
While you may be tempted to go shopping, there are still plenty of reasons to avoid purchasing Canadian oil stocks. International competitors, specifically in the U.S., are much better positioned, often at the expense of their Canadian peers.
Here are three reasons why you should actually be looking at U.S. oil stocks, not Canadian.
Transportation issues won’t go away
The biggest reason nearly every Canadian oil stock has been crushed is that growing supply has overwhelmed local transportation networks. Pipelines are at capacity, while pricier crude-by-rail options are also flush with demand.
Last fall, oil producers were forced to bid aggressively against each other to offload growing stockpiles of unprocessed oil. With limited storage options, producers were forced to sell at any price. Crude prices in Alberta, for example, dropped to less than US$20 per barrel.
Meanwhile, most U.S. companies were still fetching Brent or WTI crude prices, which remained above US$50 per barrel. The ability to price at more than double your competitors is a huge advantage in a struggling industry.
While Alberta has ordered thousands of new rail cars and local pipeline companies are rushing to install new capacity, the supply constraints will likely continue for years to come. Many Canadian oil stocks have bounced back from their lows, but this major headwind will present itself many more times.
Cost competition is frightening
Not only can U.S. oil producers sell their product for a premium, but they’re often producing output at a cheaper cost.
In March, I wrote how Exxon Mobil is proving why Canadian oil stocks are in trouble. “Exxon plans to reduce the cost of pumping oil in the Permian to about US$15 a barrel,” I wrote, “a level only seen in the giant oil fields of the Middle East.”
Meanwhile, Canadian oil sands producers like Canadian Natural Resources and Cenovus Energy have breakeven levels above US$40 per barrel.
Competition isn’t coming only from Exxon. Both Chevron and Royal Dutch Shell are planning to aggressively grow their U.S. output based on falling costs. Over the next few years, many Canadian companies may not be able to produce at a competitive price point.
Access to capital is crucial
In the future, Canadian oil companies will need to compete directly with U.S. producers like never before. That’s a tough forecast considering the emerging competitors are well-financed behemoths like Chevron, Exxon, and Royal Dutch Shell.
As more and more Canadian energy stocks struggle for cash amid troubled balance sheets, U.S. competitors continue to have access to cheap, plentiful capital. We’re already seeing capital markets become hesitant to hand lifelines to Canadian oil companies. U.S. peers are having a much easier time.
If you’re thinking about buying Canadian oil stocks, think again. With better transportation networks, lower extraction costs, and cleaner balance sheets, U.S. competitors look to have a much brighter future.
