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A pump jack draws oil from the ground at a hydraulic fracturing operation near Bowden, Alta. (Jeff McIntosh/Jeff McIntosh for The Globe and Mail)
A pump jack draws oil from the ground at a hydraulic fracturing operation near Bowden, Alta. (Jeff McIntosh/Jeff McIntosh for The Globe and Mail)

Investors are the casualties in a booming oil patch Add to ...

Alberta’s oil patch is roaring. Oil prices are flying, pipelines are pumping millions of barrels a day, and companies are engaged in a rollicking spending spree.

Every 2½ weeks, companies shovel another billion dollars into oil sands projects. Drilling rigs across the province are tapping big new pools of oil. And firms desperate for skilled workers are scouring the globe to help them get on with ambitious growth plans. Western Canadian oil output is expected to surge by more than a third to 3.6 million barrels a day by 2018.

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When Suncor Energy Inc. in February announced record 2011 profit and cash flow of $9.75-billion, chief executive officer Rick George couldn’t quite restrain himself: “Internally, we actually thought we had a shot at a $10-billion cash flow number,” he said.

“We didn't quite get there. But listen, it's all good, and really has been a great year.”

Alberta’s energy frenzy has all the makings of a hollering rodeo party. But there’s one group conspicuously missing out on the action: investors.

In the midst of a boot-stomping boom, oil and gas has been among the country’s worst-performing sectors of the stock market. Since the global economic crisis, benchmark oil prices have soared from below $40 (U.S.) a barrel to above $100. Many Canadian energy stocks, however, have been left in the dust.

Just in the past 12 months, the Canadian energy index has fallen about 19 per cent. Some of its most important players are faring even worse. Suncor Energy Inc. and Canadian Natural Resources Ltd. are down about 25 per cent. Canadian Oil Sands has dropped 35 per cent, while Talisman Energy Inc. and Encana Corp. shares have plunged more than 40 per cent.

It’s not a small problem. Energy companies make up about 17 per cent of the Canadian stock market. That’s down from 20 per cent a year ago. Sagging energy stocks are a big factor behind the broader TSX index’s 12.6 per cent retreat over the past year, sharply underperforming the Dow Jones industrial average’s 4.6 per cent climb.

Confidence in Canada’s energy sector is being shaken by a host of issues making investors unsure about the payoff from Alberta’s boom. The reasons for worry are many and varied, but they collectively point to a deeper issue. Faith in Canada’s energy business is eroding. Those who once viewed the oil sands in particular as a glittering money factory suddenly have important new reasons to be skeptical. Despite the vast sums pouring into Alberta and Saskatchewan oil fields, the earning power of the sector is being strained, and its ability to fund its growth while also spinning big profits is now under question. That challenge is critical, since success for the energy sector’s development is key to Canada’s overall economic performance

Among the energy industry’s many headwinds: Oil prices in Canada are suffering from a local supply glut created by a lack of export infrastructure; spending on many big new energy projects is far exceeding budgeted levels due to soaring costs for labour, materials and other inputs; there’s concern about the profit margins and reliability of some projects around Fort McMurray; and natural gas prices have crashed.

It’s enough to send even the most patient investors in some of the sector’s flagship companies looking for better returns elsewhere.

The shift in sentiment is striking. In the darkest days of the post-crash market misery, Canadian Oil Sands saw its share price briefly crater to $16.65. Today, with oil prices nearly triple their 2009 low, the company trades barely above $20, a far cry from levels above $50 reached in 2008.

CEO Marcel Coutu has taken to telling investors that if they buy now, they get the company’s infrastructure for less than what it’s worth. The oil, they get for free. Plus, they get paid 6 per cent a year in dividends to park their cash.

“It goes to show you the impact the perception in the market, versus the fundamentals, can have on your share price,” Mr. Coutu said in an interview. “It is ridiculous.”

That, at least, is the view that dominates downtown Calgary, and its office towers filled with executives and fund managers and analysts scratching their heads about investors’ pessimistic outlook.

“We ask all the analysts to understand why. But to be frank about it, we just don’t know the answer,” said John Ferguson, chairman of Suncor Energy Inc., pointing to a corporate outlook that “has never been better.”

But others say the outlook leads to a more uncomfortable conclusion: The surge of cash flowing onto corporate books today isn’t going to stay there. It is, instead, going to be diverted in future to higher construction costs and rising royalty payments. Already, many new oil sands projects need oil prices of $80 a barrel and higher merely to meet basic profit requirements.

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