Keystone Risk Worries U.S. Oil Sands Investors: Corporate Canada
U.S. investors cut stakes in oil-sands stocks, including Suncor Energy Inc. (SU) and Cenovus Energy Inc., as delays to the Keystone XL project and the lack of pipeline capacity depressed Canadian crude prices.
U.S. ownership of Calgary-based Suncor, Canada’s largest energy company, fell 8.2 percentage points in the past three years while Cenovus saw its U.S. shareholder base fall 5.9 percentage points, according to data compiled by Bloomberg.
“You’ve got a theoretically valued resource that can’t come to market,” Ted Harper, who helps oversee more than $9 billion at Frost Financial Management Group in Houston, said in a phone interview yesterday. He pointed to Keystone XL’s delays and challenges facing other proposed Canadian export pipelines. “U.S. investors tend to be more shorter term in terms of their returns focus than their Canadian and European counterparts.”
TransCanada Corp. (TRP)’s $5.3 billion Keystone XL is one of several projects designed to ease congestion from booming oil-sands projects and move the fuel from Alberta to refineries. Stymied by the lack of market access, Canadian energy companies have underperformed U.S. peers by 55 percentage points on Standard & Poor’s indexes during the past three years as Western Canada Select oil prices averaged $19.53 a barrel less than the U.S. benchmark, according to data compiled by Bloomberg.
The timeline for U.S. approval of Keystone XL will make the planned start of operations in the second half of 2015 “difficult,” TransCanada Chief Executive Officer Russ Girling said yesterday in an interview at Bloomberg headquarters in New York. “I hope a decision can be made this year.”
The company has spent about $2.3 billion on Keystone XL as it awaits U.S. approval, Girling said. “I think what we need is probably something that looks like 24 months or so, approximately, plus or minus a few months, from the time we get the permit,” to complete the line, he said.
Investor wariness, which caused some Canadian energy shares to fall, can be blamed on a shortage of pipelines to the continent’s coasts and the resulting price gap between Canada’s heavy crude and global grades, Toronto-Dominion Bank analysts led by Menno Hulshof said in a July 15 note. Hulshof declined to comment when reached by telephone.
“There are always ebbs and flows in share ownership, but based on the regular interaction we have with our investors and the feedback we receive we’re not overly concerned with the modest 4 percent drop we’re seeing from 2011 to today,” Sneh Seetal, a spokeswoman for Suncor, said in an e-mail yesterday.
The protracted U.S. government review of Keystone XL has “had a sentiment impact” on some Canadian oil stocks, said Timothy Parker, who manages about $6 billion at T. Rowe Price International Inc. in Baltimore. “It is pushing off the dream of where they might have been.”
U.S. holdings in Canadian Natural Resources Ltd. (CNQ), the nation’s largest heavy oil producer according to its website, dropped 2.9 percentage points. TransCanada’s U.S. ownership lost 3 percentage points.
A more than doubling of oil-sands production, to 5.2 million barrels a day by 2030, hinges on construction of new pipelines including Keystone XL, the Canadian Association of Petroleum Producers said in a forecast last month. Alberta has the third-largest proved oil reserves in the world, after Saudi Arabia and Venezuela, according to the provincial government.
The company reapplied with a new Nebraska route last year and split the project in two, building the southern portion that doesn’t require a permit first. In April, TransCanada bumped back its target to complete Keystone XL to the second half of 2015, forecasting costs will rise amid delays receiving the needed approvals for construction.
The reduction in U.S. investment in Cenovus (CVE)“is largely linked to pipeline congestion,” which results in a greater oil price difference, Sheila McIntosh, vice president of environment and corporate affairs at Cenovus, said in an e-mailed statement yesterday. She called the decline a “short-term issue.”
Canadian Natural declined to comment.
TransCanada’s Girling rejected the notion that some kind of chill from Keystone has affected Canadian energy stocks and said an improving economy tends to cause investors to sell TransCanada shares. “Cyclically, when interest rates rise, people migrate out of our stock,” Girling said.
Prices for Canada’s Western Canada Select crude have rebounded from a record $42.50 a barrel discount to West Texas Intermediate in December, according to figures compiled by Bloomberg. The difference between the benchmarks was $16.50 yesterday. Rising rail shipments and pipeline reversals have increased market access and helped to narrow the gap, according to a June 15 report from Peters & Co., a Calgary investment bank.
Jeff Martin, a Peters & Co. analyst, didn’t immediately respond to a phone message from Bloomberg News seeking comment on the report.
Canadian stocks leveraged to oil-sands crude prices including Canadian Natural have in turn gained this month, also boosted by higher U.S. refinery demand, Chris Damas, an analyst at BCMI Research in Barrie, Ont., said in a July 12 phone interview.
U.S. investors haven’t fled all Canadian oil stocks. Canadian Oil Sands Ltd. (COS), the largest owner of the Syncrude Ltd. oil-sands mining and upgrading project that produces light, synthetic crude, has seen U.S. holdings rise about 12 percentage points in the last 2 and 1/2 years, the most recent time period with available figures.
Siren Fisekci, a spokeswoman for Canadian Oil Sands, declined to comment in an e-mail yesterday.
Americans may be leaving Canadian oil stocks for other opportunities, including U.S. energy companies with operations focused on single developments, such as “key shale plays that capture investors’ imaginations,” said T. Rowe Price’s Parker.
ConocoPhillips (COP) has gained more U.S. investors in the past three years. Exxon Corp., the largest U.S. energy company, has seen a 1.4 percentage point decline in ownership by U.S. investors and Chevron Corp. (CVX) has experienced a 1.2 percentage point drop.
For Canadian energy stocks, getting Keystone “passed and moved through, which frankly, I still give it pretty good odds, has got to be supportive,” Parker said.
Frost Financial reduced its position in Suncor and Cenovus relative to its other North American energy holdings until the second quarter, when it started buying the Canadian companies on share price weakness, Harper said.
TransCanada expects the pipeline will be approved because it provides jobs and boosts access to oil from a stable supplier to the U.S., Girling said yesterday.
“There is only one rational decision here,” Girling said. “Denial of this pipeline is not in any way rational. At best, it’s symbolic.”
Environmental groups fighting approval of Keystone XL argue it would worsen climate change by allowing development of the oil sands, Canada’s fastest growing source of carbon emissions. Supporters, including labor organizations and oil industry groups, say the project would create jobs and improve U.S. energy security.
Development of the oil sands depends on construction of pipelines to the continent’s coasts, said Mark Teal, a founding partner of Meckelborg Financial Group Ltd. in Saskatoon, Saskatchewan. Keystone XL has been a “scapegoat” for the challenge of exporting Canadian oil, he said.
U.S. approval of Keystone XL would signal to investors who are wary of Canadian energy stocks that opposition to pipelines can be overcome, said Teal, who helps oversee about C$250 million ($241 million). “Keystone XL is going to be the model for many more pipelines,” he said.
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