January 2020

The last barrel

Hope for the Canadian oil industry?
Craig Fleming / World Oil

In November, Canada’s beleaguered energy sector suffered another major blow, as Encana announced plans to move its headquarters to the U.S., and rebrand under the name Ovintiv. The announcement is especially painful, as the marquee company was established in 1883, when the Canadian Pacific Railway drilled for water near Medicine Hat, Alberta, and accidentally discovered natural gas. The Calgary-based company said that it will establish an HQ in the U.S. in 2020, pending various approvals. Encana joins pipeline owner TransCanada, which changed its name to TC Energy in 2019.

The move has intensified the gloom hanging over the Canadian energy industry, which has been caused primarily by overly aggressive environmental activism, combined with fumbling by governmental authorities, which has intensified a lack of pipeline space and choked off prospects for growth. The lack of transportation and investment capital has caused foreign companies to divest $30 billion of Canadian assets in the past three years.

Caustic environment continues. The Encana announcement came about two weeks after Prime Minister Justin Trudeau won a second term on Oct. 21. Trudeau’s election means larger federal deficits and continued uncertainty for the energy sector, according to investors and analysts. However, Trudeau’s Liberals were reduced to minority status in parliament and will need the support of other parties to enact legislation. But according to APAC market strategist Stephen Innes, Trudeau’s election “is horrible news for the energy sector, as oil producers are struggling to get product to global markets in the absence of increased pipeline capacity.” And Canadian investment management expert Thomas Caldwell added, “I think Canada will be a less popular destination for international funds and for investing.” The energy sector could see negative fallout following the election, as one major area of contention will be the construction of new pipelines to reduce bottlenecks in Canadian crude markets, said Candice Bangsund, who manages $115 billion at Fiera Capital.

Guarded optimism? “It remains possible that the Trans Mountain expansion will proceed as it has already received Cabinet approval,” said David Doyle, analyst at Macquarie. “The same cannot be said for any new proposed pipelines, which face an even more challenged path ahead.”

Die cast before Trudeau’s re-election. However, for Encana, the move is a logical shift, since CEO Doug Suttles has been selling off the company’s Canadian assets since taking the reins in 2013. Suttles has been responsible for building a major position in the U.S. through the purchase of Permian driller Athlon Energy, and the acquisition of Freeport-McMoRan’s Eagle Ford shale assets. The company also has purchased production in Oklahoma’s SCOOP and STACK plays, and in the Bakken with its acquisition of Newfield Exploration. Encana said the move to the U.S. will expose it to larger pools of investment, including American index funds and better align the company with its U.S. peers. Suttles said no job cuts are planned, and there won’t be any decrease in Canadian investment. Suttles added, “Encana’s new name isn’t meant to denigrate Canada or its policies and politics,” and that the recent federal election, in which the pro-energy Conservative Party failed to unseat Prime Minister Justin Trudeau, wasn’t a factor in the move. The move is most likely due to an unfavorable business climate that has caused underperformance by Encana and Cenovus Energy, the oil sands business spun off in 2009. Both stocks have underperformed since then, with Encana down 78%, including dividends, while Cenovus has dropped 48%. Canada’s benchmark stock gauge has doubled in the same period.

Hope on the horizon? According to some analysts, Canadian energy firms outperformed their U.S. counterparts in 2019, and the trend is projected to continue in 2020. Canada’s energy index rose 12.7% in 2019 versus 5% for the comparable U.S. gauge, led by pipeline firms TC Energy and Enbridge, which have risen about 39% and 19%, respectively. “The Canadian industry has been starved of capital for four years now,” said Rafi Tahmazian (Canoe Financial). He sees the U.S. shale plays slowing and projects that Canada’s industry is “on the edge of extreme profitability.” And Bank of America expects some oil sands companies to outperform shale. BoA said that shorter-cycle projects have attracted investment in recent years, making U.S. shale a “victim of its own success,” as production growth has continued, while in Canada it’s moderated. U.S. political risks and shale production concerns are additional reasons for a potential shift of funds back into Canadian energy stocks, according to Eight Capital. These trends are “helping to create a shift in tide, which should put Canadian oil sands in favor over U.S. E&Ps.”

Anxiety, depression and despair. Despite the prospect of increased funding and ship-by-rail allowances, the election of Prime Minister Trudeau to a second term has caused “anxiety, depression and despair” in the oil sands hub city of Fort McMurray, says Robbie Picard, who leads an oil sands advocacy group. “I’m terrified for our future.” The elections results are a referendum on a dispute central to the country’s identity: Is Canada a global oil superpower, or is it a leader in fighting climate change? Mr. Trudeau and his Liberal supporters argue that it can be both, using proceeds from oil and gas to fund green-energy solutions. Mr. Trudeau contends he has supported the industry more than his Conservative predecessor, spending $3.5 billion to save a key pipeline project from cancellation, taking heat from environmentalists in the process. Derek Evans, CEO of oil sands producer MEG, has a different opinion. Canada is at a critical crossroads: “do we want our energy industry to be a global player, or go into hibernation and slowly shut down?” “That’s the point we’re at.”

About the Authors
Craig Fleming
World Oil
Craig Fleming Craig.Fleming@WorldOil.com
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