Wednesday, May 17, 2023

An Oil Production Phaseout Would Cost Canada $74 Billion

A hypothetical scenario in which Canada phases out its oil production would end up costing it some $74 billion (C$100 billion), with Alberta bearing the brunt of that blow, a new report has suggested.

Produced by a non-partisan think tank, the Public Policy Forum, the report looked at two scenarios for Canada achieving a net-zero status with regard to carbon emissions.

One of the scenarios envisaged energy policies that targeted the oil industry with stricter emission regulations but without resorting to a production cap or a phaseout. The think tank called that scenario the “aggressive decarbonization model”.

The other scenario, which the Public Policy Forum dubbed the “accelerated phaseout model”, involves a phaseout of oil production.

“Both pathways arrive at net zero but with unequal economic impacts along the way,” the authors reported.

Under the accelerated phaseout scenario, Canada’s economy would grow at a rate 0.1% slower than the growth rate under the aggressive decarbonization scenario.

“This apparently small difference compounds over time, leading to $100 billion excess lost GDP in 2050, a three percent contraction of the overall economy,” the think tank also said.

“This essentially amounts to a deep recession without a recovery ever materializing. The lost output carries forward each year in perpetuity.”

The bulk of those hypothetical losses would naturally fall to Alberta given its role in Canada’s oil production. Yet, as some commentators have noted, there are no plans for a phaseout of Canada’s oil production.

"There's no phase-out going on there. There's no phase-out of the oil and gas sector either. They're talking about an emissions cap, not a production cap. And it's disappointing to see that conflated in this report," one economics professor told CTV News.

Indeed, there is no production cap on the table for now but the federal government of Canada has been squeezing the oil industry with reams of regulations aimed at making them reduce their emissions, which may at some point involve a production cut in the same way that Shell would have to cut its oil and gas output to achieve the emissions cut it was ordered to effect by court.

By Irina Slav for Oilprice.com

May 12, 2023


$70 Oil Creates Opportunity In Canadian Oil Stocks

  • Canadian energy stocks are looking increasingly cheap after the latest selloff in crude prices.

  • Wall Street still believes that Canadian energy stocks will outperform their American brethren.

  • Debt-light Canadian oil and gas producers are poised to reward shareholders again in 2023.

Earlier in the year, Wall Street was mostly bullish about the prospects of Canada’s Oil Patch with the sector expected to resist a sharp downturn in the current year. Unfortunately, expectations have now taken a turn for the worse: earnings in Canada’s energy industry are now expected to decline 19% over the course of 2023 compared to previous projections of a more modest 8% decline. The biggest reason for the poorer outlook is falling gas prices, which have hit Canadian oil and gas companies particularly hard. Natural gas prices have contracted by a third in the current year and are down 75% from their 2022 peak with an unusually warm winter followed by an equally warm autumn depressing demand. In fact, natural gas prices are now lower than year-ago levels prior to Russia’s invasion of Ukraine.

Energy sectors around the globe are expected to pull back in 2023 off a difficult 2022 comparison, though Canada had, at the end of November, been expected to suffer the least,” Bloomberg Intelligence senior associate analyst Gillian Wolff and chief equity strategist Gina Martin Adams have said.

But the outlook has become more bearish. 

Now, Canada is expected to decline more on par with the U.S. and Europe, with energy sectors in emerging markets taking the lead for 2023 earnings expectations,” Wolff and Martin Adams warned.

Adding to the woes, UK-based Barclays Bank has now said it will no longer provide financing for oil sands companies or oil sands projects. 

Related: Saudi Aramco Pushes Back IPO For $30B Energy Trading Unit

Still, despite the grim earnings outlook, Wall Street still believes that Canadian energy stocks will outperform their American brethren, with the S&P/TSX Energy Index expected to return 18% in 2023 compared to a 14% return by the S&P 500 Energy Index. A lot of those gains will come in the latter half of the year with the American benchmark down 6.3% in the year-to-date while its Canadian peer has lost 3.5%. That outlook is consistent with projections by BMO Capital Markets that debt-light Canadian oil and gas producers are poised to reward shareholders again in 2023 thanks to their ability to generate ample cash coupled with their diminished appetite for acquisitions.

As for the big banks beginning to balk on the fossil fuel sector, well, the sector does not appear to be in danger of running out of backers any time soon, with private equity firms gladly stepping up. Here are three TSX energy stocks to buy on the dip.

  1. Enbridge Inc.

    Market Cap: $80.0B

    YTD Returns: -0.9%

Enbridge Inc. (NYSE:ENB) operates as an energy infrastructure company. Back in November, Enbridge told shareholders that it expects to generate strong business growth in 2023, forecasting full-year EBITDA of C$15.9B-C$16.5B. Enbridge attributes the gain to contribution from $3.8B of assets to be placed into service this year, as well as strong expected utilization of assets across core businesses.

Well, the company appears very much on track to keep its promise. 

A week ago, Enbridge reported impressive Q1 2023 results. Q1 Non-GAAP EPS of C$0.85, C$0.01 above the Wall Street consensus while EBITDA of $4.5 billion was good for 9.8% Y/Y growth. Distributable cash flow clocked in at $3.2 billion, representing a 3.2% Y/Y increase. The company reaffirmed its full-year EBITDA and DCF guidance, though it warned that strong operational performance is expected to be offset by higher financing costs due to increased interest rates.

  1. ARC Resources Ltd

    Market Cap: $7.7B

    YTD Returns: 6.0%

ARC Resources Ltd.(OTCPK:AETUF) explores, develops, and produces crude oil, natural gas, and natural gas liquids in Canada. We like the company due to its very conservative debt level and better credit rating than most of its peers. Further, its February merger with Seven Generations Energy Ltd. for $2.7-billion in stock that made the combined entity Canada's largest condensate producer and third-largest natural gas producer has proven to be profitable. Last month, Arc Resources declared a CAD 0.15/share quarterly dividend, good for 25% increase from prior dividend of CAD 0.12. The shares now yield 4.0%.

  1. Bonterra Energy Corp.

    Market Cap: $166.9M

    YTD Returns-0.9%

Bonterra Energy Corp.(OTCPK:BNEFF) is a conventional oil and gas company that engages in the development and production of oil and natural gas in the Western Canadian Sedimentary Basin. Its principal properties include Pembina and Willesden Green Cardium fields located in central Alberta. 

Bonterra faced a severe crisis in 2020 when the COVID-19 pandemic crushed oil prices. Luckily, a government-backed loan helped the company get through the dark times. Bonterra has managed to repay the loan, along with C$150 million in debt during the past year as of the third quarter. According to Chief Executive Officer Pat Oliver, the company expects to pay off its remaining C$38 million bank debt by the third quarter 2023, after which it will have new options like initiating a dividend, raising production or repaying debt further.

Last quarter, Bonterra Energy reported strong full-year results as follows:

  •  Growth production of 5% and 53% increase in oil & gas sales
  • 77% Increase in funds flow and 182% growth in free funds flow contributed significantly to improving the balance sheet
  • 44% lower net debt drove leverage ratio down to 0.8X while strategic debt restructuring affords Bonterra enhanced liquidity with approximately $17 million drawn on a $110 million bank credit facility

By Alex Kimani for Oilprice.com

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