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Heavy oil has its day

Now that it's no longer stuck with steep differentials, the commodity is on its way to its best year ever. Here's how investors can play it

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 mfawcett@albertaventure.com

Sep 12, 2014

by Max Fawcett

It wasn’t that long ago that Alberta’s heavy crude was the unwanted child of the energy industry. The companies that produced it were, somewhat ironically, faced with precariously thin operating netbacks due both to the cost of extracting it and the pricing discounts they had to take as a result of transportation backlogs. Well, no more. As BNN’s Jameson Berkow wrote yesterday, Western Canada Select (WCS) – the most commonly traded heavy oil blend in Alberta – is getting the best price relative to WTI that it’s received in more than a year. According to National Bank Financial’s Kyle Preston, WCS should average around $87 per barrel in 2014, which would be an all-time high.

As Berkow wrote, the weakening Canadian dollar is doing some of the heavy lifting on that front. But, he says, that’s not the only reason for heavy oil’s recent strength. “Refineries in the U.S. Midwest are retooling to process more heavy crude in anticipation of growing oil sands production…..Refineries such as BP’s 413,000 barrel-per-day (bpd) facility in Whiting, Indiana – which just completed a $4-billion “modernization” project earlier this year to process up to 350,000 bpd of heavier crude – are already seeking to capitalize on the trend.” Meanwhile, the transportation networks that feed those refiners are being enhanced. The volume of crude by rail continues to grow, while pipeline companies are quietly (or, as quietly as they can) expanding the capacity of existing infrastructure. Enbridge, for example, expects to add another million barrels per day of capacity to its “mainline” by the end of 2015, and should bring its 600,000 barrel per day Flanagan South pipeline into service before the end of 2014. That project will connect Chicago with Cushing, Oklahoma, and shorten the distance that trains need to travel to get their crude off the rails and into the broader network of pipes and refineries.

How can investors play heavy oil’s resurgence? By investing in the companies that produce a lot of it, of course. National Bank recommends Canadian Natural Resources (TSE:CNQ), MEG Energy (TSE:MEG), and Suncor Energy (TSE:SU), although as Berkow noted in his story, Baytex Energy (TSE:BTE), Pengrowth Energy (TSE:PGF) and Twin Butte Energy (TSE:TBE) also offer exposure to heavy oil.

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