We See Tremendous Long-Term Opportunity in Oil Sands

We are substantially lowering our fair values for the Canadian oil sands producers and integrated companies: MEG Energy MEG, Cenovus Energy CVE, Imperial Oil IMO, Canadian Natural Resources CNQ, Suncor Energy SU, and Husky Energy HUSKF . We expect lower netbacks across the board in the upstream segments as a result of lower pricing on all crude streams and higher costs due to lower production levels. In the downstream segments, we are forecasting lower refining margins in the near term.

Beyond 2021, we would still expect robust demand growth as disruptive factors like electric vehicles will take much longer to meaningfully reduce global crude consumption (see EVs, AVs, and Ride-Hailing: Gauging the Impact on Long-Term U. S. Gasoline Demand and Vehicle Ownership). Yet U.S. shale would be the cheapest source of incremental supply, and it has a marginal cost of $55/bbl for WTI. Prices must therefore recover to incentivize this expansion, or the glut will flip into a painful shortage. With the massive sell-off in the Canadian energy space, we see tremendous upside across the oil sands subsector, as we think the market is overlooking the long-term cash flow potential.

Best Idea Cenovus Energy remains our top pick among the subsector. We are lowering our fair value estimate for no-moat Cenovus Energy to $8 (CAD 11) from $14 (CAD 18). Despite the tremendous price cut, the stock looks highly oversold, and we still see tremendous upside in the stock. However, we expect the current market conditions to overhang the stock until the market can become comfortable with oil sands growth.

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