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Inside the Market What a go-ahead on Trans Mountain will mean for long-suffering TSX energy investors

The recovery of Canada’s beleaguered energy industry will be on the line on Tuesday, when the federal government announces whether it will go ahead with the Trans Mountain pipeline expansion.

The industry is anticipating approval for the $7.4-billion project, which could mark an important step in alleviating the oil sands’ perennial transportation problem, and could help renew interest in a sector investors have all but abandoned.

“Shovels in the ground on the Trans Mountain expansion is a necessary condition to ignite Canada’s energy rebirth,” Greg Pardy, an analyst at RBC Dominion Securities, said in a recent note.

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While cabinet approval would be far from the last word on the contentious pipeline, it would likely be seen as a clear positive for energy stocks, many of which are trading near record lows.

Over the past five years, there has been very little good news in the oil patch.

The U.S. shale revolution helped fuel a global oil glut that crushed crude prices starting in 2014. In Canada specifically, an inadequate pipeline network struggled to handle rising production, driving Canadian oil prices to as low as US$13.46 a barrel last November.

The sell-off in Canadian crude eased up only when the Alberta provincial government implemented mandatory production cuts, which remain in place today.

While the price discount on Alberta crude against U.S. oil has shrunk to less than its long-term average, investor sentiment toward Canadian oil producers remains extraordinarily low.

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Over the past week, several mid-sized Canadian energy companies have hit either record lows, or lows not seen in at least 15 years, including Seven Generations Energy Ltd., Arc Resources Ltd., Peyto Exploration & Development Corp. and Tourmaline Oil Corp. Those stocks have declined by between 70 per cent and 90 per cent from their respective five-year peaks.

“It’s just staggering,” Eric Nuttall, senior portfolio manager at Ninepoint Partners, said in an interview. “There’s no interest in the sector, because it’s been such a horrible place to have been invested for too long.”

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A string of setbacks in trying to expand pipeline capacity culminated with the federal government purchasing the Trans Mountain pipeline from Kinder Morgan Canada last year for $4.5-billion.

By expanding on the existing pipeline route, which runs from the Alberta oil sands to the West Coast, capacity could be nearly tripled, which would help reduce the reliance on the United States as an export market.

Last August, however, a court ruling put the project in limbo by deciding that Indigenous groups had not been adequately consulted. Even if cabinet gives the go ahead on Tuesday, there will almost certainly be more legal challenges to follow.

Should those hurdles be cleared, the Trans Mountain expansion will do little to ease pipeline congestion in the short term, with project completion not expected until 2022 at the earliest.

“Until you actually get steel going into the ground and you start putting oil through, the market is going to be reluctant to ascribe full probability that the pipeline will be completed,” Samir Kayande, an analyst with RS Energy Group in Calgary, told The Globe and Mail.

Approval of the Trans Mountain expansion would also likely have little effect on capital investment in the oil sands, at least in the short term.

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With production curtailment in place at least until the end of the year, and possibly longer, expansion plans have been put on hold across the sector.

Canadian oil production is expected to increase by an average of 1.4 per cent a year over the next 15 years, which is half the pace of growth that was planned for five years ago, the Canadian Association of Petroleum Producers said last week.

Should the Trans Mountain expansion come to fruition, it would shift the dynamics for the sector, especially those concentrated in heavy-crude production in the oil sands.

And yet, at this point, given the prolonged absence of positive developments, even an incremental step forward could help change attitudes toward oil and gas stocks, Credit Suisse analyst Manav Gupta wrote in a note.

“We believe a go-ahead on [the Trans Mountain expansion] would help with the turnaround in sentiment in a big way.”

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