Heavy oil producers survived the blow-out in differentials last winter. Now, are they in for another rough ride?
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
The problems that Canadian Natural Resources is having with its Primrose heavy oil project aren’t a bellwether for the entire sector, according to Brickburn Asset Management’s Martin Davies, who was on BNN this morning to talk about the subject. “We’ve been producing heavy oil for a long, long time in Canada. We’ve got the regulations in place for doing that, and the operators know what the regulations are and they know the reservoirs very well.”
He came armed with a couple of picks, too. His favourite name is Baytex Energy (TSE:BTE), which h likes for its production growth and its exposure to narrowing differentials between Canadian heavy oil and WTI. “There’s a solid amount of growth going on here,” he said, “both the production growth and pricing change. During the last six months, those differentials have narrowed quite a bit.” Davies said that the combination of increases in production volumes – the company’s production in its most recent quarter came in at the high end of its guidance – and a more favourable pricing environment should move the stock up. The market, however, has yet to cooperate. “Since the company has released the second quarter results, the stock’s down three per cent,” Davies said. “Go figure.” Still, he said, its day should be coming. “It’s been under a tremendous amount of selling pressure by American investors who don’t want to get caught behind the transportation bottlenecks. But the smart money is coming back.”
But Charles St-Arnaud, a former Bank of Canada economist who now works at Nomura Securities, painted a decidedly darker picture for Alberta heavy oil producers like Baytex. After narrowing substantially in the first half of 2013 on the back of the completed reversal of the Seaway Pipeline and growing oil-by-rail activity, the spread between Canadian heavy oil and WTI may be poised to widen again – or even blow out completely, as it did late last year. Why? St-Arnaud says that it has everything to do with the disaster in Lac-Mégantic. “In the short term, you could expect the transportation of oil by rail to continue to decline. There’s a lot of uncertainty around what the new regulations will be, and a lot of them are reviewing their own operations and looking at the risks and the financial impact on them.”
In the medium term, St-Arnaud said, one potential outcome could be the retirement of the older tanker cars that many companies had been using to move crude to market. “It will take time for that new supply of cars to arrive on the market, so we may be in for a couple of years where the transportation of oil by rail may not increase as much as we’ve seen for the past few years, and that will create the same type of situation that we had late last year.”