‘Build a God damned pipeline’: Oil price crisis has energy investors pondering the falling knife

Historically low prices for Canadian oil have unfairly punished the country’s energy companies, according to those who follow the sector, and that is leaving battered investors who are watching the losses pile up with a difficult decision on their hands.

“I think there’s good opportunity to be had but you have to be careful you’re not grabbing a knife that’s pretty sharp and falling rapidly, because it hurts,” said Martin Pelletier, portfolio manager at TriVest Wealth Counsel Ltd. in Calgary.

The price for Western Canadian Select, the country’s heavy crude, hit its last major peak this year on July 13, when prices reached US$54.74, before falling more than 70 per cent to reach an all-time low of US$13.46 on Nov. 15. While the price has since rallied somewhat and closed at US$16.43 on Tuesday afternoon, that is still less than a third of the year-to-date high of US$57.99 reached in May.

The decline has far outpaced that of the U.S. benchmark, West Texas Intermediate, which declined another six per cent on Tuesday and now sits at US$53.39, down from US$71.03 on July 13.

The differential has led to a sharp pullback for Canadian energy stocks, many of which had already been stagnating despite impressive third-quarter earnings reports.

Despite being protected from low Canadian oil prices, downstream companies such as Suncor Energy Inc. and Imperial Oil Ltd. have seen their share prices fall by more than 19 per cent and 11 per cent respectively since July 13. The pain has been amplified for upstream companies such as EnCana Corp, whose shares are down 46 per cent in the same time period and Cenovus Energy Inc, which has been subject to a 28 per cent decline.

Eric Nuttall, the senior portfolio manager for Toronto-based Ninepoint Partners LP, said he’s still bullish on oil and continues to have outsize weightings in companies such as Athabasca Oil Corp. and Baytex Energy Corp. Nuttall said he’s optimistic that a pipeline — either the Keystone XL or the Trans Canada pipeline — will eventually be built.

“And if you’re a believer in that, there’s significant and meaningful upside in (Western Canadian Select) exposed names,” Nuttall said.

Most analysts agree that the reason prices are plunging is an excess of supply that cannot be sent to market due to a lack of pipelines. Plans have been approved to replace Enbridge Energy’s Line 3 pipeline, but the Trans Mountain pipeline and Keystone XL remain in limbo.

The discount, according to Alberta Premier Rachel Notley, is resulting in Canada losing $80 million per day, but the debate over how to address the problem has been complicated by diverging interests within the industry.

Cenovus CEO Alex Pourbaix has suggested that oil companies cut down on production, but that proposal doesn’t sit well with downstream companies such as Suncor and Husky Energy Inc., which don’t want to shut off the taps because they’re not as exposed to the discounts.

One way to solve the disagreement, Pelletier said, would be for companies to form an oligopoly and learn to act as a unit for important issues.

“And if nothing comes of that, then you have to bring the hammer down,” Pelletier said, meaning a forceful intervention from Notley.

Both Cenovus and Canadian Natural Resources Ltd. have called for government intervention to find a solution.

Given how broken the system is right now … perhaps one can make the argument that a temporary 10% shut-in would rebalance inventories

Eric Nuttall, Ninepoint Partners

Nuttall said he likes to think of himself as supporting a free market, but the reeling energy industry has made him think twice about the appropriate response.

“Given how broken the system is right now … perhaps one can make the argument that a temporary 10 per cent shut-in for the next three to four months would rebalance bloated inventories,” Nuttall said.

All Canadians would be the winners of such legislation, Nutall said. The losers would be the downstream companies who have no need or desire to halt production.

A shut-in of 120,000 barrels per day, however, would only be a temporary fix, Nuttall said: If the oil differential is “compressed based upon that then you eventually have a loosening and those shuttered barrels returning to market.”

On the other hand, operating without a solution in the midst of uncertainty means that non-integrated companies are going into “bunker mode,” Nuttall said. If companies such as Cenovus continue to take it upon themselves to cut production, that leaves their market share at risk — and the integrated companies may swoop in to take advantage.

Because the stock market has also not been rewarding for energy companies, they won’t have much option beyond keeping production flat and spending maintenance capex until a longer-term solution presents itself.

Pelletier agreed, suggesting a slowdown during the winter drilling season is in the cards if prices don’t rebound and that could result in layoffs across the sector. The industry, he warned, cannot continue to exist under the current prices.

On Friday, Finance Minister Bill Morneau told reporters there was no “magic bullet” to fix the problems that the energy sector is undergoing. Nuttall disagreed, saying Morneau’s words were a “failure of the most basic IQ tests,” before making a suggestion.

“Build a God damned pipeline,” Nuttall said.

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