Suncor Back in Favor as Alberta Heavy Oil Price Doubles

Suncor Energy Inc. (SU) and other Canadian oil stocks have risen almost twice as much as global competitors after the country’s crude rose to a one-year high on optimism that pipeline bottlenecks are easing.

Heavy-oil producers Suncor, Imperial Oil Ltd. (IMO), Canadian Natural Resources Ltd. (CNQ), Cenovus Energy Inc. (CVE) and Baytex Energy Corp. (BTE) have returned an average of 15 percent in the past three months as the benchmark price of Canadian heavy oil soared to as high as $91.54, more than double its low in December. An index of global oil stocks rose 7.6 percent in the same period.

The resurgence in Canadian oil prices and stocks comes as pipeline bottlenecks that cut profits earlier this year have been eased by a combination of new U.S. Gulf Coast pipelines, increased rail transportation and supply shortages in Canada.

Some analysts are recommending investors position themselves for additional gains by Canadian oil stocks ahead of a U.S. decision on TransCanada Corp. (TRP)’s Keystone XL pipeline.

“You are starting to see much more interest in these names among buy-siders,” Sameer Uplenchwar, a senior analyst with Global Hunter Securities LLC in Calgary, said in a phone interview. “To put a multiple back on these companies, you need to get clarity on Keystone XL, even if the Obama administration comes out and says ‘No.’”

Photographer: Daniel Acker/Bloomberg

Some analysts are recommending investors position themselves for additional gains by Canadian oil stocks ahead of a U.S. decision on TransCanada Corp.'s Keystone XL pipeline. Close

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Photographer: Daniel Acker/Bloomberg

Some analysts are recommending investors position themselves for additional gains by Canadian oil stocks ahead of a U.S. decision on TransCanada Corp.'s Keystone XL pipeline.

Lower Values

Uplenchwar said that the potential for additional stock gains is shown by the diminished valuations since 2010, when pipelines from Alberta to the U.S. Midwest started showing the first signs of being clogged with surging output from Canada’s oil sands.

Large-capitalization oil producers Suncor, Imperial, Canadian Natural, Cenovus and Baytex have an average enterprise value of eight times their 12-month trailing earnings before interest, taxes, depreciation and amortization, a measure of core profits, down from 12.9 times in 2010, according to data compiled by Bloomberg.

Multiples declined as Canadian heavy oil was oversupplied in the U.S. Midwest and there were few ways to get supplies to coastal refineries that use more expensive overseas imports. Oil stockpiles at the U.S. supply hub in Cushing, Oklahoma, reached a record 51.9 million barrels in January.

As a result, some U.S. investors scaled back their holdings of Suncor, Cenovus and other oil producers. U.S. ownership of Calgary-based Suncor, the country’s largest energy company, fell 8.2 percentage points in the past three years, according to data compiled by Bloomberg.

Canadian Prices

Reg Curren, a Cenovus spokesman, and Andrea Beblow, a spokeswoman for Baytex, declined to comment when contacted by Bloomberg. Representatives of Suncor, Imperial Oil and Canadian Natural didn’t respond to e-mails requesting comment.

Benchmark Western Canadian Select heavy oil fell from an average price of $14.90 below U.S. West Texas Intermediate oil in 2010 to a record low of $42.50 below WTI prices in December 2012. Prices have been improving for most of this year, reaching a high of $9.25 below WTI last month, and trading at a $22-a-barrel discount yesterday.

The price discounts caused Canadian oil producers’ stocks to underperform their U.S. counterparts by 41 percent since the access issue first emerged in January 2011, Menno Hulshof, a TD Securities Inc. analyst, wrote in a note to clients last week. “We may, however, be seeing the first signs of a reversal of this trend.”

Bakken Fields

A decision on whether to issue a cross-border permit to TransCanada’s Keystone XL pipeline is expected from the U.S. government this year. The pipeline, under review for almost five years, would carry as much as 830,000 barrels of oil from northern Alberta to the U.S. Gulf Coast, and is opposed by environmentalists concerned about greenhouse-gas emissions and the risk of pipeline spills.

Uplenchwar said that while the Keystone XL pipeline has been the focus of discussions about pipeline constraints, prices have recovered without it because more production is moving by rail. In North Dakota, railroads moved 75 percent of the state’s more than 700,000 barrels a day of Bakken oil in April, up from just 39 percent a year earlier, according to a monthly report by the North Dakota Pipeline Authority.

Even if Keystone XL isn’t approved, Uplenchwar said more pipelines are waiting in the wings to remove bottlenecks between the Midwest and Gulf Coast.

“As long as Keystone keeps getting pushed down the line, companies keep on waiting,” Uplenchwar said. “If Keystone gets canceled, they can move on and just sign up on some other pipelines.”

‘Inflection Point’

Several pipeline projects are planned to move more oil to the coasts. Later this year TransCanada expects to finish its Gulf Coast Pipeline, bringing as much as 700,000 barrels a day from Cushing to Nederland, Texas. Next year, Enbridge Inc. (ENB) expects to complete its Flanagan South pipeline from Illinois to Cushing and the second phase and twinning of its Seaway pipeline, a joint venture with Enterprise Products Partners LP (EPD), from Cushing to Texas.

“The heavy oil producers have ended their long prolonged sell off and have only recently started to trade higher,” Alistair Toward, an analyst at PI Financial Corp. in Calgary, wrote in a note to clients last week. “Heavy oil companies are at an inflection point and we recommend that investors increase their exposure.”

He recommended the stocks of small emerging producers including BlackPearl Resources Inc. (PXX), Palliser Oil & Gas Corp. (PXL), and Rock Energy Inc. (RE), all based in Calgary.

‘Monumental Drivers’

Chris Cox, a Calgary-based analyst at AltaCorp Capital Inc., said the market’s view of Canadian oil prices changed when Imperial Oil’s 110,000 barrel-a-day Kearl project was delayed earlier this year. At the same time, BP Plc (BP/)’s 413,000 barrel-a-day refinery in Whiting, Indiana, finished a conversion that will allow it to take more heavy crude earlier than expected, he said.

“Kearl volumes have continued to be pushed back, and Whiting moved forward, so those are such monumental drivers of supply and demand that when they moved in opposite directions it completely changed our outlook on heavy oil,” Cox said in a telephone interview last week.

Additional rail supply in Canada later this year will help provide a more supportive market for the Canadian oil producers until the new Gulf Coast pipelines are built next year, Cox said.

“There’s definitely the case to be made that pipeline congestion, while not completely a thing of the past, doesn’t give us as many reasons to be fearful as it has in the last year,” he said.

To contact the reporter on this story: Edward Welsch in Calgary at ewelsch1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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