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Stock Strategist Industry Reports

Oil Sands Will Survive and Then Thrive

The market does not appreciate their near-term resiliency nor the long-term cash flow potential.

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Since the start of the oil price and stock market crashes in March, the oil sands stocks we cover have vastly underperformed the general market along with oil prices, missing out on the subsequent rallies. Investors appear concerned about producers’ near-term balance sheet health and look to be questioning these companies’ ability to generate sustainable long-term cash flow from the vast resource potential that lies in the oil sands. In our view, the oil sands producers have ample liquidity to survive the uncertain demand environment. Additionally, oil sands maintenance production costs are lower than the market thinks, as a significant portion of capital is spent on the up-front build. We expect producers to generate free cash flow at lower-than-expected oil prices and can pay down debt and meet dividend obligations.

Furthermore, we still anticipate that all three major pipeline expansion projects--Enbridge’s Line 3 replacement, TC Energy’s Keystone XL, and the Trans Mountain Expansion--will be built by the end of 2023. In our view, this will provide enough takeaway capacity to stabilize heavy oil pricing and greatly expand market access. Assuming that the pipelines are built, we expect oil sands producers to tap into their vast resource potential and generate significant long-term free cash flow if oil prices recover to our midcycle average annual $55/barrel West Texas Intermediate forecast.

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Joe Gemino does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.