Expanding pipelines and railroads are helping Canada’s biggest energy companies get higher prices for oil, leaving bulls in command in the options market.
While Suncor (SU) Energy Inc.’s U.S.-traded shares have slumped 6.4 percent this year, options trading shows increasing demand for contracts that rise when the stock advances. Bullish bets on Suncor are the most expensive since 2011 relative to bearish ones, according to data compiled by Bloomberg. Calls on Canadian Natural Resources Ltd. make up nine of the 10 options with the highest ownership.
Oil producers are shipping more crude by rail and building pipelines to ease holdups in the supply chain, leading to less volatility in the price of Canadian heavy crude oil and higher profits. Energy companies are shifting crude shipments onto trains while some key pipelines are delayed amid protracted regulatory reviews, including the Keystone XL pipeline from Alberta’s oil sands to the U.S. Gulf Coast.
“Even though there were resources in Canada, they were landlocked and couldn’t get to the market, but now pipeline and rail capacity is coming online which will de-bottleneck the region,” said Sameer Uplenchwar, an analyst with Global Hunter Securities LLC in Calgary. “The past few years, no one wanted to invest in Canada because of the volatility. That situation is reversing itself, so more investors are taking a look at the Canadian industry.”
Suncor’s Montreal refinery began receiving crude shipments by rail in December. The company is transporting about 30,000 barrels a day to the refinery, with an eventual target for 40,000 barrels a day, the company said in February. In a March 6 conference call, Canadian Natural President Steve Laut said his company was transporting about 15,000 barrels a day by rail.
Enbridge Inc. (ENB), Canada’s largest pipeline owner, won regulatory approval this month to reverse and expand its 639-kilometer (397 miles) Line 9B system, allowing for more shipments of crude oil from Western Canada to refineries in Quebec.
The improvements in oil transportation have led to less volatility in the price gap between Alberta’s benchmark Western Canadian Select and West Texas Intermediate. The differential, which swung between $9.25 and $42 a barrel in 2013, has stayed within $17.90 and $25.25 this year.
More stability in crude prices helps producers better predict cash flow, which may lead to more share buybacks and dividends, Uplenchwar of Global Hunter Securities said.
Calls that pay out should Suncor rise 10 percent cost 1.75 points less than puts betting on a 10 percent decrease Jan. 23, the least since May 2011. The price relationship known as skew stood at 2.73 points March 11, according to three-month data compiled by Bloomberg.
Representatives at Suncor referred to investor presentations on the company’s website when asked by e-mail about options trading on the stock. An e-mail from Canadian Natural’s investor relations department stated that the company’s management declined to comment.
While Suncor Chief Executive Officer Steve Williams has made a lot of progress, it hasn’t been reflected in the stock price yet, said Bob Decker, a fund manager at Aurion Capital Management Inc. in Toronto, who owns the shares.
“The jury’s still out on whether they can recapture the glory days when it was a hot stock,” Decker said. “This is a company that three years ago had a stretched balance sheet, was spending beyond its cash flow and couldn’t raise its dividend. They’ve come a long way in a short space of time.”
Kash Pashootan, a fund manager with First Avenue Advisory of Raymond James Ltd. in Ottawa, said he bought Suncor shares on speculation dividend payments will increase. The company, which extracts crude from oil sands and runs refineries and transportation operations, is still down 2.2 percent this year in Canadian trading.
“I don’t think a lot of their projects are priced in,” Pashootan said. His firm manages about C$200 million ($180 million), including shares of Suncor. “If there is some growth there, then that’s another catalyst for Suncor shares to appreciate.”
Canadian Natural (CNQ) has seen its U.S. and local-market shares rally more than 8 percent this year. The Calgary-based company will grow earnings by 32 percent this year, according to data compiled by Bloomberg based on analysts’ estimates.
All of the 10 most-owned contracts on Suncor are calls. Implied volatility, used to gauge the price of options, for three-month contracts with an exercise price 10 percent below Suncor shares is 21.99, according to data compiled by Bloomberg. The measure for calls is 19.3.
“This is the early innings of a renewed romance with U.S. investors,” said John Stephenson, fund manager at First Asset Investment Management Inc. in Toronto. He helps manage about C$2.7 billion, including shares of Suncor. “The real torque for a stock is when the investors in London and New York say ’I want some of that oilsands, get me some Suncor.’”
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