The oil sands could be ‘the ultimate ATM’ for Canada – and investors

Just like that, the Canadian oil patch is a pariah no more.

Mere months ago, the oil and gas sector was seen as poisonous by politicians, environmentalists and investors alike.

But in a time of economic hostility, conventional energy is being reframed as a tool for Canada’s economic survival and independence.

Big projects are on the table of the sort that the industry long wrote off. A new pipeline to the Pacific Coast. Port expansions to access overseas markets. Prime Minister Mark Carney has signalled a break from the politics of the past decade with the pledge to turn Canada into an “energy superpower.”

Could investors really be facing another Canadian energy boom? It’s surprisingly plausible.

“This is a new day, for sure,” said Peter Tertzakian, founder of Calgary-based think tank Studio.Energy and a member of the Prime Minister’s Canada-U.S. relations council.

“If the major projects announcements include expansion of oil pipelines with port access to international markets, I think you’ll start to see the catalysts fall into place.”

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It’s easy to think of Canadian oil and gas as past its prime simply because it’s been out of favour for so long.

The days of rampant drilling ended years ago. But that has a lot more to do with politics and the lack of pipeline capacity than it does with the resource itself.

In fact, the sector could level up without much trouble at all.

Consider the oil sands, which produce about 3.5 million barrels of oil per day – more than three-quarters of Alberta’s total output.

Mr. Tertzakian estimates that an additional 1 million barrels per day could be extracted using existing infrastructure. That’s billions of dollars of annual revenue that could be accessed without a major capital investment.

The common perception that the oil sands are an expensive source of oil is an outdated one. The upfront costs to develop them are indeed enormous. But after that, they are incredibly long-duration resources.

A standard oil well might decline in production by 10 per cent a year. With shale, which accounts for most U.S. crude production, the decline rate is much higher – up to 50 per cent in the well’s first year.

The oil-sands decline rate is near zero in some cases. Canadian Natural Resources Ltd. CNQ-T recently reported that its oil-sands mining and upgrading reserves have a remaining life of 43 years.

“The oil sands are the ultimate ATM,” said Jennifer Stevenson, a vice-president and portfolio manager at Scotia Global Asset Management.

“You don’t have to spend tons of capital to find a new resource. The big money was spent years ago.”

Those were the years of the commodity supercycle, when money gushed into the oil sands.

The energy sector dominated the domestic stock market in those days. From 2000 to mid-2014, returns from the Canadian exploration and production industry nearly tripled the gains in the overall TSX TXCX.

The next 10 years weren’t so great as the supercycle fizzled, investors went away and the federal Liberals put the brakes on most major resource projects. Without the infrastructure to export overseas, Canada had no option but to send nearly all its exported oil to the U.S., at a discount no less.

This became a decade of austerity for the oil patch. Producers aggressively cut debt, shaved down costs and focused on returning money to shareholders.

“Gone are the Wild West days. These companies are run more like banks,” said David Sherlock, a portfolio manager at Sherlock Capital Solutions of Raymond James Ltd. in Calgary.

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A recent Reuters analysis highlighted how the oil sands has been reshaped into one of the lowest-cost oil plays on the continent. The five largest producers can be profitable even when West Texas Intermediate prices drop below US$45 a barrel. The break-even point for U.S. shale operations, meanwhile, is around US$65 a barrel.

Should the country attempt to monetize its energy riches, the sector is positioned well to do so. It is lean, deleveraged, ready to scale up and favourably priced on the stock market.

The main holdup, of course, is the lack of pipeline capacity, which the country has wrestled with for much of the past 15 years.

Perhaps the logjam is now breaking up. Since U.S. President Donald Trump began to threaten Canada’s economic sovereignty, pipelines have seen a big uptick in public support.

In a draft list of nation-building projects compiled by the federal government, a pipeline carrying Alberta oil through northwest British Columbia to the Pacific Coast is among them.

Many doubts linger. Some question the wisdom of new pipelines at a time when practicality should take precedent. Funding is an issue as federal finances are likely to increasingly come under pressure. As is Canada’s commitment to cut carbon emissions, if intensifying oil-sands output is under consideration.

But we should no longer think that such projects are simply not possible, Mr. Tertzakian said.

“We need to define our strategic ambition. I would say at a minimum, we don’t want to be an economic weakling that sells all our commodities at a discount and gets pushed around in an era of geoeconomic warfare.

“That’s the reality we face today.”