'Too good to be true': Canadian oil firms could wipe out debt by 2025, start hiking dividends if prices stay high
An oil price rally this rapid has only happened three times in the last 20 years
Author of the article: Geoffrey Morgan
Publishing date :Jun 30, 2021 •
The global oil benchmark Brent traded above US$75 per barrel on Tuesday, more than double its value from the beginning of November, and some international oil executives now believe the commodity could head as high as US$100 per barrel. PHOTO BY BLOOMBERG/GETTY IMAGES
CALGARY — In the middle of one of the fastest run-up in oil prices in a decade, analysts say their financial models for Canadian oil and gas stocks almost look “too good to be true,” though there are still events that could stop the rally dead in its tracks.
The global oil benchmark Brent traded above US$75 per barrel on Tuesday, more than double its value from the beginning of November, and some international oil executives now believe the commodity could head as high as US$100 per barrel. Not far off from Brent, a barrel of West Texas Intermediate oil for August delivery was at US$73.46 per barrel.
The higher prices have also lifted Canadian oil and gas company stocks. The S&P/TSX Capped Energy is up 55 per cent year to date, compared to the 16 per cent gain during the same period for the broad S&P/TSX Composite Index. Even the U.S. S&P 500 Energy Index is lagging behind with a 41 per cent increase this year.
If Canadian oil and gas companies continue to maintain their cost discipline, analysts believe they could offer substantial returns.
In a research note entitled, “The Models Look too Good to be True,” Peters & Co. analysts write that Canadian oil and gas companies are close to hitting their debt-reduction goals and could soon start allocating billions in free cash.
“For a sector that was in real trouble a year ago, this is obviously a major change and begs the question of how each company will react in terms of allocating capital,” the analyst wrote, adding their models show “most companies” will be able to completely pay off their debts or be in net cash positions by the end of 2025.
The investment broker estimates if the current levels hold, most Canadian companies would wipe out their debt or be in net cash positions by 2025, leaving them in a position to start raising dividends and buy back shares to the tune of nearly $110 billion from 2021 to 2025.
Similarly, National Bank of Canada Financial analysts told investors to “buckle up” as they think that rising commodity prices and lower costs have created the “perfect storm for oil and gas equities.”
Large-cap Canadian oil companies are trading as if oil prices were averaging US$50 per barrel to US$55 per barrel, “which provides capital appreciation upside of approximately 60 per cent (on average) over the next 12 to 18 months.”
The bank analysts believe there is close to 100 per cent upside in Cenovus Energy Inc. shares, followed by roughly 60 per cent upside for Imperial Oil Ltd., Suncor Energy Inc. and Canadian Natural Resources Ltd.
If Canadian oil and gas companies continue to maintain their cost discipline, analysts believe they could offer substantial returns. PHOTO BY REUTERS
Oil prices have climbed nearly 50 per cent this year as key economies such as the U.S., U.K. and China have reopened, buoyed by mass vaccination campaigns. Crude stockpiles in China, the world’s biggest importer of crude, have dwindled to the lowest this year. As India emerges from a deadly coronavirus surge, an uptick in local fuel consumption has prompted the nation’s biggest refiner to boost production.
“The fundamentals are strengthening and that bodes well for pricing support,” Scotiabank senior economist Marc Desormeaux said, adding there were a few potential events that could cause an oil price correction, including nuclear talks between Iran and the U.S. that could lead to an easing of sanctions on Tehran and therefore more oil exports.
Other risks to oil prices include OPEC increasing production and the outbreak of more variant coronaviruses cases in economies that are trying to re-open as the pandemic wanes. The cartel is meeting Tuesday and Wednesday to decide whether to add more barrels to the oil market.
Global oil demand in 2021 was expected to grow by 6 million barrels per day, with 5 million bpd of that in the second half, OPEC Secretary General Mohammad Barkindo told Tuesday’s meeting of the Joint Technical Committee of OPEC+, an alliance made up of OPEC states, Russia and their allies.
“Oil prices have doubled in the last eight months and we are in fairly rare territory right now when you think about what oil prices have done so far already,” RBC Capital Markets managing director, global energy strategy Michael Tran said, adding that an oil price rally that rapid has only happened three times in the last 20 years.
Tran expects oil to average in the “high seventies” over the course of 2021 with a few short stints above that threshold. He said he’s had to revise his previously bullish oil price assumption of US$58 per barrel for 2021 multiple times as fundamentals continued to improve.
Right now, hedge funds have signed 11 long contracts on oil prices for every one short contract on crude, Trans said.
“This oil price environment is a very uncomfortable setup for oil market bears,” he said, noting that more economies are re-opening as the COVID-19 pandemic recedes in parts of the global economy and that is spurring oil demand higher at a time when energy companies have promised to hold production flat.
For oil companies, the prospect of significantly higher-than-expected commodity prices is tempting producers to drill as prices rise, though concerns about volatility remain.
“There is quite a chance to reach US$100 but we could see again in the coming years some lows as we have been accustomed to volatility,” TotalEnergies CEO Patrick Pouyanne said at the Qatar Economic Forum last week, according to Reuters.
Other Big Oil executives share his outlook.
“We’re probably going to see both US$50 and US$100 oil, don’t ask me about the sequence though,” Royal Dutch Shell Plc CEO Ben van Beurden said at the same conference.
With a file from Reuters
• Email: gmorgan@nationalpost.com | Twitter: geoffreymorgan
Oil prices have climbed nearly 50 per cent this year as key economies such as the U.S., U.K. and China have reopened, buoyed by mass vaccination campaigns. Crude stockpiles in China, the world’s biggest importer of crude, have dwindled to the lowest this year. As India emerges from a deadly coronavirus surge, an uptick in local fuel consumption has prompted the nation’s biggest refiner to boost production.
“The fundamentals are strengthening and that bodes well for pricing support,” Scotiabank senior economist Marc Desormeaux said, adding there were a few potential events that could cause an oil price correction, including nuclear talks between Iran and the U.S. that could lead to an easing of sanctions on Tehran and therefore more oil exports.
Other risks to oil prices include OPEC increasing production and the outbreak of more variant coronaviruses cases in economies that are trying to re-open as the pandemic wanes. The cartel is meeting Tuesday and Wednesday to decide whether to add more barrels to the oil market.
Global oil demand in 2021 was expected to grow by 6 million barrels per day, with 5 million bpd of that in the second half, OPEC Secretary General Mohammad Barkindo told Tuesday’s meeting of the Joint Technical Committee of OPEC+, an alliance made up of OPEC states, Russia and their allies.
“Oil prices have doubled in the last eight months and we are in fairly rare territory right now when you think about what oil prices have done so far already,” RBC Capital Markets managing director, global energy strategy Michael Tran said, adding that an oil price rally that rapid has only happened three times in the last 20 years.
Tran expects oil to average in the “high seventies” over the course of 2021 with a few short stints above that threshold. He said he’s had to revise his previously bullish oil price assumption of US$58 per barrel for 2021 multiple times as fundamentals continued to improve.
Right now, hedge funds have signed 11 long contracts on oil prices for every one short contract on crude, Trans said.
“This oil price environment is a very uncomfortable setup for oil market bears,” he said, noting that more economies are re-opening as the COVID-19 pandemic recedes in parts of the global economy and that is spurring oil demand higher at a time when energy companies have promised to hold production flat.
For oil companies, the prospect of significantly higher-than-expected commodity prices is tempting producers to drill as prices rise, though concerns about volatility remain.
“There is quite a chance to reach US$100 but we could see again in the coming years some lows as we have been accustomed to volatility,” TotalEnergies CEO Patrick Pouyanne said at the Qatar Economic Forum last week, according to Reuters.
Other Big Oil executives share his outlook.
“We’re probably going to see both US$50 and US$100 oil, don’t ask me about the sequence though,” Royal Dutch Shell Plc CEO Ben van Beurden said at the same conference.
With a file from Reuters
• Email: gmorgan@nationalpost.com | Twitter: geoffreymorgan
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