“The market is concerned that, while you may have an oil price that’s over $100, companies won’t be able to benefit over an extended period of time,” said Ari Levy, a vice-president at TD Asset Management who oversees several energy and resource funds. “Costs are going to eat up a lot of the incremental gain.”
For example, the price tag for Shell’s oil sands mine expansion has gone from $4-billion to more than $14-billion, albeit partly due to design changes. Imperial Oil’s Kearl project rose from $8-billion to $10.9-billion, which also came with some design changes.
In other cases, projects have encountered startling underperformance. Nexen Inc.’s Long Lake project was supposed to reach 72,000 barrels a day of production by late 2009. It has yet to hit half that. The sector has suffered a litany of other setbacks, from oil gushing out of burst pipes to flames leaping out of blazing oil sands plants.
The problem extends beyond costs. Markets are also beginning to lay bare some of the vulnerabilities facing Canada’s oil patch, which is largely dependent upon exports to distant geographic markets, and has paid the penalty for that in numerous ways. In recent years, pipeline troubles have backed up crude in Canada, sending local prices relative to global benchmarks into a tailspin. Further troubles in building new pipelines have had a dramatic impact, pumping ever more oil along existing lines into the U.S. Midwest at a time when refineries there are already flush with oil.
The result: For much of the first quarter, Canadian crude was North America’s dollar-store blend, selling at such a steep discount that CIBC calculated the Canadian oil patch would forfeit $18-billion of revenue in a year.
First-quarter energy results, which start in earnest next week, are expected to be the first real show of damage from that pricing. And with no major new pipes expected to enter service for at least two years, the prospect of pricing discounts extending into the future, compressing earnings, is real.
“We’ve had that overhang, and that’s been a big issue,” said Jennifer Stevenson, vice-president and portfolio manager for energy with Goodman & Co. Investment Counsel.
Even bigger problems for the oil patch lie with natural gas, which is in freefall amid a massive supply glut, tumbling some 40 per cent below last year.
Natural gas gets little of the attention of oil, which has been far more profitable in recent years. But it remains extraordinarily important to Canada. In 2010, the latest year for which Statistics Canada has compiled numbers, gas made up fully 47 per cent of Canada’s oil and gas output. Even major oil companies send vast amounts of natural gas to market. Nearly a third of Suncor’s production is gas. It’s more than a third for CNRL, and 46 per cent for Cenovus Energy Inc.
For many investors, “when they see the Western Canadian sedimentary basin, their first thought is gas,” said Rafi Tahmazian, senior portfolio manager with Canoe Financial LP in Calgary. “That is coming back to haunt us.”
Indeed, some of the slide in the Canadian energy index parallels the tumble in natural gas prices, which are now so low that many wells barely break even.
Still, gas prices are only part of the story. Basement pricing is actually a boon to oil sands producers, since gas is an important input cost (although Cenovus, for example, doesn’t make use of 80 per cent of its gas output). And even companies with little gas are being punished. Oil makes up 97 per cent of the energy produced by Renegade Petroleum Ltd., which is down a fifth in the past year – nearly 30 per cent in the last month and a half – and now trades at just over four times cash flow, well below the six that is normal.
Or take Legacy Oil + Gas Inc., a company that has fallen 41 per cent in value the past year. Nearly 85 per cent of its output is oil. CEO Trent Yanko says global economic concern, fuelled by continued anxiety about European performance mixed with slowing economic growth in China, Russia, Brazil and India, is to blame.
“People are just a little skittish in this market,” he said.
Add to that a broader shifting in fund patterns, as investors leave Canada to profit from growth prospects in the United States. Canadian companies have been particularly shunned while global names have held up: In the past 12 months, Exxon Mobil Corp. is up 2 per cent. Royal Dutch Shell PLC is down just under 3 per cent.
“I think it’s somewhat of a macro call,” Mr. Yanko said. “U.S. investors aren’t putting a lot of money into Canada. They’re pulling it out and putting it into U.S. equity.”