Analyst Note| Joe Gemino, CPA |
With oil prices on the rise, Canada's crude pipeline egress problem is resurfacing. Oil sands economics have proved to be resilient, and many existing projects can generate free cash flow at oil prices below $40 a barrel West Texas Intermediate, or WTI. Supply will soon be approaching precrisis levels, and Canada's oil industry will need new pipeline infrastructure to bring new crude to market and prevent heavy oil prices from crashing as they did in December 2018. With Joe Biden winning the U.S. presidential election, it is almost assured he will revoke the Keystone XL's presidential permit, shelving the project indefinitely. Fortunately for oil producers, we do not expect the same opposition to Enbridge's Line 3 replacement. Line 3, combined with the Canadian government's Trans Mountain expansion and modular capacity additions on existing pipelines, will create 1.1 million barrels of new pipeline capacity by the end of 2023.
Additionally, oil sands producers can take advantage of favorable heavy oil pricing in the U.S. Gulf Coast. Refiners in the region are battling declining imports from Venezuela and Mexico, a trend we expect to continue. With the Keystone XL no longer the answer to the region's problems, prices are attractive enough to incentivize rail transportation as a supplement market option for oil sands producers. Accordingly, we expect Canadian supply to grow 6.3 million barrels of oil per day by 2030, increasing by 1 mmbbl/d over the next decade.
We think the market is underestimating the growth prospects and the cash flow potential of the oil sands producers along with the midstream pipeline operators. Accordingly, we see pockets of undervalued stocks, which include wide-moat Enbridge, narrow-moat TC Energy, and Canadian Natural Resources.