With oil down more than 20% from its record high, Canadian energy stocks have
been beaten down to more affordable levels. But as concerns over demand and
refining margins grow, it can be hard to determine which Canadian energy stocks
are still viable profit plays.
Strong oil exports helped to boost Canada’s trade surplus in June. The trade
surplus increased to $5.4 billion (C$5.8 billion) from $4.8 billion (C$5.2
billion) in May, the national statistics office announced earlier this week. But
a large part of that increase was due to higher prices, not higher volumes. Oil
reached a record of $147 per barrel on July 11. Since then, oil has dropped to
below $115 a barrel.
The drop in oil prices coupled with a curb in demand from consumers who are
fed up with high prices at the pump have put pressure on all of the oil majors,
causing share prices to fall. But Canadian oil companies have one huge advantage
over both their southern rivals in the United States and European
competitors.
Many Canadian oil company holdings are in stable geopolitical regions, free
from threats of state seizure or terrorist attacks. Government seizing of assets
in Venezuela and Russia and the volatile political unrest in areas such as the
Nigerian Delta have plagued oil majors such as Exxon Mobil Corp. (XOM) and Royal
Dutch Shell PLC (RDS.A, RDS.B). But Canadian oil companies that mainly operate in North
America and Northern Europe are free from such hassles.
Also, companies that operate in less-developed nations are often subject to
production-sharing agreements with the local governments, which can quickly eat
into the oil majors’ bottom line.
Barron’s reported that Oppenheimer analyst Fadel
Gheit wrote in a recent research note that “high oil prices are not good for Exxon’s business as they
increase government take in royalties and taxes, strengthen national oil
companies, limit access to resources, but, above all, depress the share
price.”
But without the burden of similar agreements, Canadian oil companies are set
to profit from any future spike in oil prices.
On the flip side, compared to other countries, many Canadian oil reserves are
in tar sands or shale oil, which are harder and more costly to refine. At a
certain price point, these deposits become less viable as they can cost upwards
of $30 per barrel to refine into a finished product.
This would be cause for concern if oil were set to continue its recent
decline. But the current pullback in oil prices is likely to be short-term and
improved technology is making such reserves more affordable to extract and
refine.
Over the long-term, oil will be on the rise again due to shrinking global
reserves and increased demand from emerging markets.
