Canadian oil stocks have an opportunity to rise again, after an early 2023 slump that caused them to underperform the broader markets. In the first two months of 2023, oil prices fell, leading to similar weakness in Canadian oil stocks. However, there are reasons to think that the weakness in oil prices could reverse. This year, the Organization of Petroleum Exporting Countries (OPEC) and Russia are both cutting their oil output. These actions are not propping up prices just yet, but they could in the future. If they do, then we’d expect Canadian oil stocks to start rising again, as they are arguably already very cheap at today’s prices.
The current bearishness in oil prices is likely temporary
One factor that argues for an upturn in Canadian oil stocks is the likelihood that the current decrease in oil prices is temporary.
Currently, there are three factors reducing the supply of, and increasing the demand for, oil:
- China’s economic re-opening (increases demand)
- OPEC’s output cuts (decreases supply)
- Russia’s output cuts (decreases supply)
With these three factors present at once, we’d expect oil prices to rise. Why aren’t they rising? That’s pretty easy to explain.
The U.S. government and other foreign governments are trying to keep oil prices low. Just recently, the U.S. announced that it would re-start the release of oil from its strategic petroleum reserve (SPR). The U.S. is doing this to offset the price increase we’d likely be seeing because of the three factors listed above. With the U.S. selling its oil reserves, the price of oil is going down. However, there is only a limited supply of oil in the SPR. This can’t continue forever.
Debt has been repaid
Another factor that could push Canadian oil stocks higher is debt repayment. Last year, most Canadian oil companies repaid their debt. As a result, they can now earn rising profits even with oil prices unchanged.
Take Cenovus Energy (TSX: CVE) for example. It’s a Canadian oil company that paid off $9 billion worth of debt last year. If you pay off $9 billion worth of debt that you’re paying 4.5% interest on, you shave off $405 million in costs each year. That makes a big difference.
In its most recent quarter, CVE revealed $2.97 billion in cash from operations, up 36%, and $784 million in net income, up from a $408 million loss. It was a pretty strong quarter. Yet, incredibly, oil wasn’t even that much higher in December 2022 than it was in December 2021. Oil gave up a lot of the gains that it made early in 2022 by the end of the year. However, Cenovus was able to put out rising profits, thanks in no small part to debt repayment.
How high could oil go?
As we’ve seen, Canadian oil companies’ debt-repayment programs are enabling them to deliver rising profits. That’s great news, but ultimately, in the long run, these stocks need rising oil prices in order to thrive. How high oil will go in the long run is anybody’s guess, but once the U.S. SPR release ends, the price could probably hit at least $80 — the level it was at before news of the latest release was announced.
