Will the Latest News From Alberta End Canada’s Oil Crisis?

Is the outlook for Canada’s oil sands producers like Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) improving?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

While Alberta’s mandatory production cuts caused Canadian crude prices to soar, this is only a quick fix with no long-term solution in sight. Both heavy oil benchmark Western Canadian Select (WCS) and light oil price Edmonton Par have more than doubled from record November 2018 lows. This occurred because their differentials to the North American benchmark West Texas Intermediate (WTI) narrowed significantly to be around US$11 and US$4, respectively. That has been a boon for Canadian upstream oil producers, particularly those focused on the oil sands like Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE), which until the production cuts were announced was making a loss on each barrel of bitumen produced.

New solutions being considered

Because of the short-term nature of the solution put in place by Alberta, the provincial government and oil sands industry are considering other longer-term options. Key among these is alleviating the transportation bottlenecks, which along with growing production, saw a record supply localized supply glut emerge in Western Canada by expanding crude by rail transportation. To achieve this, Alberta’s government has begun negotiations to expand the provinces rail network to boost the volume of crude transported by rail by around 120,000 barrels daily over the next three years. While this will go some way to reducing transportation constraints, it will be insufficient to fully address the lack of exit capacity for Canada’s oil producers.

Even record crude by rail shipments in October 2018 of 327,229 barrels, which was 21% or 57,400 barrels daily greater than the previous months, failed to prevent the discount applied to Canadian heavy rising to a record high in October 2018. The key issue weighing on the prices of Canadian crude blends as well as natural gas is a lack of pipeline capacity magnified by growing production. The Canadian Association of Petroleum Producers (CAPP) expects that on average, domestic oil production will expand annually by around 94,000 barrels daily over the next 16 years. Additional production will swamp the new capacity being brought online by expansions of existing pipelines as well as Alberta’s proposed increase to the volumes of crude transported by rail. 

Another option being considered by the provincial government is to increase Alberta’s refining capacity. According to analysts, this will have little positive effect because the province already produces more fuels than it consumes, and the pipelines, which transport petroleum products to outside markets are at capacity. By boosting local refining capacity, it solely moves the problem further down the value-chain without dealing with the core problem, a critical lack of capacity on export pipelines that connect the oil patch to crucial U.S. refining markets.

There are no indications of that issue being dealt with anytime soon. There are steep regulatory hurdles to building new pipelines while existing pipeline developments such as Enbridge Inc.’s Line 3 expansion continue to face considerable community and environmental opposition. It also takes substantial amounts of time and capital to construct as well as commission new pipelines, rendering it  virtually impossible to expand pipeline capacity overnight. That means there is every likelihood that the wide differential between WCS and WTI will remerge once the production cuts wind down in roughly nine months.

Investor takeaway

This isn’t good news for Cenovus. Since buying ConocoPhillips Co.’s Canadian oil sands assets has become Canada’s third-largest bitumen and heavy oil producer that makes roughly 76% of its total petroleum output. Should the differential between WCS and WTI widen once Alberta’s production cuts wind down, Cenovus’ profitability will once again decline. That is evident from its third quarter 2018 results; despite WTI averaging US$66.75 a barrel, Cenovus only reported a netback – a key measure of profitability – before commodity hedges of around US$19 per barrel produced. This was a significant contributor to its quarterly net loss from continuing operations of $242 million compared to a profit of $275 million a year earlier.

Until the lack of pipeline capacity is addressed, it’s likely that any strategies implemented by Alberta and the oil sands industry will only have a temporary effect on narrowing the differential between Canadian oil prices and WTI. That makes most oil sands producers, especially those with minimal or no refining capacity unattractive investments.

Should you invest $1,000 in Cenovus Energy right now?

Before you buy stock in Cenovus Energy, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Cenovus Energy wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any of the stocks mentioned. Enbridge is a recommendation of Stock Advisor Canada. 

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Energy Stocks

A meter measures energy use.
Dividend Stocks

Where I’d Invest $15,000 in Top Utilities Stocks for Steady Income

These utility stocks are some of the top choices, but they aren't the usual group of investments.

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

How I’d Allocate $1,000 in Energy Stocks in Today’s Market

Discover why energy stocks are crucial for Canadian investors as the election approaches amidst tariff challenges.

Read more »

oil and natural gas
Energy Stocks

3 Canadian Energy Stocks to Buy and Hold for Decades of Passive Income

Energy stocks can be some of the best choices for consistent income, and these three remain top performers.

Read more »

oil and gas pipeline
Energy Stocks

Why Billionaires Are Pulling Cash Out of U.S. Stocks and Buying Canadian Energy

This analyst-recommended energy stock could be one to watch in 2025.

Read more »

oil pump jack under night sky
Energy Stocks

Top Energy Stocks to Invest in 2025

Most investors are avoiding energy stocks over fears that Trump tariffs could bring a structural change in the energy supply…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Why I’d Include These 3 Essential Dividend Stocks in My TFSA

Here are three dividend stocks I’d include in my TFSA today.

Read more »

Asset Management
Energy Stocks

Why I’d Consider These 3 Small Caps for a $5,000 Investment With Long-Term Horizons

Investing in small-cap stocks such as Vecima and Total Energy should help you deliver outsized gains over the next 12…

Read more »

canadian energy oil
Dividend Stocks

How I’d Invest $4,000 in Canadian Small-Cap Stocks to Potentially Double My Money

This year I'm buying energy stocks like Suncor Energy Inc (TSX:SU).

Read more »