Energy investors are shunning Canada's oil industry as fears over U.S. protectionism outweigh improving financial results.
Several major companies returned to profitability through the fourth quarter while boasting increased cash flow and lower production costs as crude prices rose – a sharp reversal after a punishing slump marked by deep cuts to staffing levels and budgets.
But the spectre of a border-adjustment tax championed by U.S. Republicans remains a top concern for its potential to render Canadian crude exports less competitive than shale production in the United States. Pipeline constraints in key exploration zones and big reserve writedowns by major oil sands producers have only added to pessimism dogging the sector, though analysts say the latter has little impact on day-to-day operations.
"It certainly doesn't buoy it up. It doesn't get anyone who's not in the space thinking they should be looking at it," said Rob Bedin at RS Energy Group in Calgary.
"Canadian stocks are clearly out of favour compared to the U.S.," he added. "Do we think it's right? No. Does it make sense? No. Is that what's happening? You bet."
The Toronto Stock Exchange's energy group has slumped more than 10 per cent this year, as fears over a possible border-tax mount. By contrast, U.S. energy stocks are down about 5 per cent over the same period.
Even companies with low costs and strong operations in the Montney and Deep Basin exploration regions in Alberta and British Columbia have been pressured, partly because of warmer weather eroding normally strong winter prices.
Since late December, Alberta wholesale natural-gas prices have skidded about 35 per cent and on Monday were hovering around $2.11 per gigajoule, according to the NGX electronic exchange.
This comes as Republicans weigh a possible 20-per-cent tariff on U.S. imports, offset by exemptions on exports, as part of a wider tax overhaul. President Donald Trump has sent mixed signals about his support for the levy, but he appeared to warm to the idea last week, telling Reuters that it "could lead to a lot more jobs in the United States."
Executives at some of Canada's biggest energy companies insist deep cross-border trade ties will help shield the sector from punitive measures. They also point to former oil CEO-turned-diplomat Rex Tillerson's familiarity with the oil sands and Mr. Trump's support for the Keystone XL oil pipeline as positives.
The industry has only recently started to shed caution as crude prices stabilize, with several companies boosting capital spending for the year. U.S. West Texas intermediate oil has recovered to just shy of $55 (U.S.) a barrel from lows under $30 a year ago. The contract settled up 6 cents on Monday at $54.05.
In the oil sands, Cenovus Energy Inc. has increased planned 2017 spending by nearly 25 per cent and restarted work at a 50,000-barrel-a-day expansion at its flagship Christina Lake project.
This month, the company said it may revive two more deferred projects at its steam-driven operations by 2019, with details around costs and timing expected at an investor day scheduled for later this year.
Cenovus and other oil sands producers are eager to show they can compete with a resurgent U.S. shale patch, which offers faster returns and few of the infrastructure constraints that have frustrated Canadian producers for years.
Indeed, U.S. investors who once flocked to the Northern Alberta resource are instead turning to U.S. shale producers with better growth prospects at lower crude prices, said Laura Lau, senior portfolio manager at Brompton Funds in Toronto.
Oil giant Exxon Mobil Corp. and Houston-based ConocoPhillips Co. last week dropped billions of barrels of bitumen reserves in Canada from the so-called proved category in their accounts, a technical revision signalling they cannot be produced economically at oil prices that prevailed last year.
As with investors, the oil majors once "looked to the oil sands like, 'Wow, look at all that resource,'" Ms. Lau said. "But they have their own plays now, so they don't have to come to Canada."