The Canadian energy sector has offered its investors little in the way of hope since a global oil price war made the price of a barrel of the country’s crude cheaper than a pint of beer, forcing companies to slash dividends and threatening the continuity of others.
But amid a torrent of bad news, the energy sector was quietly rallying as the S&P/TSX Capped Energy Index had gained more than 34 per cent in nearly two weeks. So when it finally delivered good news on Tuesday, investors loudly voiced their excitement in the form of investment dollars.
TC Energy Corp. announced that it will be going ahead with the construction of the Keystone XL pipeline in early April after the Alberta government bought a US$1.1 billion equity stake in the project and said it would be providing another US$6 billion through a loan guarantee.
On the back of that news, the S&P/TSX Capped Energy Index surged another 15 per cent, meaning that it has now rallied more than 54 per cent since bouncing off its lows on March 18. The sector’s leaders in Suncor Energy Inc., Cenovus Energy Inc. and Canadian Natural Resources Ltd. led the rally and each closed up between 17 and 23 per cent.
“The Keystone line was the one line that everyone said was never going to happen,” Eight Capital analyst Phil Skolnick said. “I think this shows what seemed to be the impossible is now possible.”
Skolnick described the news as a “massive positive” for the industry. It allows 800,000 barrels per day to be transported and essentially eliminates the need for transport by rail, he said.
Starved of pipelines for so many years, Canada will soon have two pipelines, Keystone XL and Trans Mountain, under construction. Enbridge’s Line 3 replacement is also approaching that point.
While the news does add a ray of brightness to the sector’s future, for some analysts, the sharp bounce in share prices was puzzling.
Perhaps lost among the excitement of the rally is that Western Canadian Select prices continued to slide and were trading below US$4 per barrel on Tuesday. There’s simply no demand. In some parts of the U.S., oil prices have gone negative. At current levels, they may not even be covering transportation costs, Skolnick said, and certainly once operations are factored in producers are “under water.”
This is still years down the road before coming into play. Yeah, it spurs interest in the sector, but it doesn’t change the companies’ 2020/2021 plans
Jeffrey Craig, Veritas Investment analyst
Veritas Investment Research analyst Jeffrey Craig also warned that the Keystone announcement, while a positive development, won’t heal producers’ wounds.
“This is still years down the road before coming into play,” Craig said. “Yeah, it spurs interest in the sector, but it doesn’t change the companies’ 2020/2021 plans.”
What might be happening in the stock market, Craig said, is that investors are coming to the realization that a bottom for oil prices may be imminent, with short sellers racing to cover their positions.
The sector’s leaders were oversold in March, he said, and even in the middle of a tremendous rally, they should still be attractive to investors. Craig points to Canadian Natural in particular because the company may be able to sustain its business with West Texas Intermediate prices as low as US$35, whereas some American energy companies would need prices in the US$50 range.
How these companies perform in the short term should be the main concern for investors, said Tudor, Pickering, Holt & Co. analyst Matt Murphy. For years, companies and investors alike complained about a lack of egress and although that’s now being addressed, it’s no longer a top priority.
“The number one challenge right now is … really a global supply/demand fundamental issue,” said Murphy, who added that even Saudi Arabia and Russia coming to an agreement about a curtailment would not solve the problem.
Without news signalling that OPEC is ready to come to the table and that the coronavirus outbreak has been contained, the rally doesn’t mean much. In fact, it’s unlikely to be sustainable, he said.
“Things are probably going to get worse before they get better,” Skolnick said.