‘Very, very bullish’: Trans Mountain to shift pricing power to Canada's oil and gas producers


Jeff Lagerquist
Updated Thu, April 11, 2024 

Workers place pipe during construction of the Trans Mountain pipeline expansion in Abbotsford, B.C., on Wednesday, May 3, 2023. 

THE CANADIAN PRESS/Darryl Dyck (The Canadian Press)

Whether it’s the Trans Mountain oil pipeline expansion set to begin commercial service on May 1, or the large-scale LNG export facility nearing completion on the West Coast, Canada's oil and gas executives are eyeing higher prices spurred by the first new major take-away capacity in over a decade. That has stock analysts calling for shares to push higher as producers look to new foreign markets.

The improving egress picture in Western Canada was a hot topic at this week’s BMO Capital Markets CAPP (Canadian Association of Petroleum Producers) Energy Symposium in Toronto. Randy Ollenberger, one of the bank’s top oil and gas equity analysts, called the long-awaited projects “very, very bullish for the sector.”

“We’re in the midst of something we haven’t seen for a long time in Canada, and that’s the expansion of pipeline capacity. This includes LNG capacity off the West Coast. We haven’t had that for over a decade,” he told conference attendees on Tuesday.

“[Companies are] on the cusp of delivering significant amounts of surplus cash flow to shareholders. When it arrives in shareholders' pockets, it will start to positively influence the valuation of the sector,” he added. “We don’t think it’s being fully appreciated by investors in the space.”

Moving oil and gas out of Western Canada via pipeline to overseas markets has been an elusive goal for the industry, which relies on exports to the United States.

Canadian crude trades at a discount to the U.S. benchmark West Texas Intermediate (CL=F) due to its heavier grade and transportation costs. In 2018, Alberta’s government temporarily limited oil production in the province when that price gap fell to more than US$40 per barrel due to scarce takeaway capacity.

Flash forward to 2024, when TD Bank says Canada could set a global record for production increases. Ollenberger forecasts international demand for oil is growing at the fastest clip in 13 years.

“If we don’t have that excess capacity going, we’d be putting stuff on rails. We’d be back to that circus we had a few years back where we just couldn’t move product,” Tamarack Valley Energy (TVE.TO) CEO Brian Schmidt told Yahoo Finance Canada on the sidelines of the conference. “You have to think, what would it be like without it.”

NuVista Energy (NVA.TO) CEO Jonathan Wright says two-thirds of his company’s cash flows come from producing condensate, a light oil used to blend with heavy crude so it can be pumped down pipelines. NuVista’s surging stock has ranked the Calgary-based company among the top performers in the TSX 30 over three years.

“Seeing these projects coming to fruition is starting to have a sentiment change for U.S. investors,” Wright told Yahoo Finance Canada. “More heavy oil production going down TMX, and other pipelines, means more demand for our product.”

Chris Carlsen, CEO of natural gas-weighted producer Birchcliff Energy (BIR.TO), is eagerly anticipating the startup of the LNG Canada export project in Kitimat, B.C., which he says will begin taking gas later this year. An unhedged strategy recently left his company exposed to plunging prices, prompting a dividend cut, which recently drove Toronto-listed shares lower.

Carlsen says LNG Canada will absorb a “quite substantial” chunk of natural gas production in Canada. For Birchcliff, he says that means accessing higher “world pricing” for its product.

On the oil side, Ollenberger says more pipeline capacity shifts pricing power from refiners to producers.

“Producers are competing against one another to sell their oil,” he said. “We think that’s going to change to an environment where refiners are competing to buy Canadian heavy oil.”