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 Canaccord Genuity Corp.

Better Days: The Return of the Canadian Energy Sector

Delwin Graham - Jul 15, 2021
Oil is back. The Canadian energy industry as represented by the BlackRock iShares S&P/TSX Capped Energy Index ETF (XEG:TSX) is up 48% year to date.

Oil is back. The Canadian energy industry as represented by the BlackRock iShares S&P/TSX Capped Energy Index ETF (XEG:TSX) is up 48% year to date. As the global economy works its way out of COVID-19 lockdowns, oil demand is surging, and the Energy Information Administration (EIA) of the U.S. government is now forecasting daily worldwide consumption to exceed pre-pandemic levels in 2022. However, any meaningful supply response has been hampered by capital discipline from many non‑OPEC producers, as well as by increased energy transition policies and activism. This places pricing control back in the hands of OPEC, arguably for the first time since the U.S. shale revolution completely overturned the supply side of the energy market. Not surprisingly then, oil prices have been driven higher – WTI is double its November 2020 levels. (Cf., Anthony Petrucci, John Bereznicki, “Oil and Gas, Exploration and Production”, Canaccord Genuity Equity Research, June 22, 2021)

Surging demand. In 2019, global oil demand averaged just under 101M bbl/d, peaking at 102M bbl/d late in thy rear. For 2022, the EIA is forecasting that demand will exceed 2019 levels, surpassing the 103M bbl/d by year end. Global demand should move higher as the world emerges out of COVID-19 lockdowns.

Limited supply response. Despite a rapid rise in oil prices, the supply response from non-OPEC producers has been limited. On the one hand, many western producers have been forced to “live within their means” by increasing investor focus on capital discipline. On the other hand, any new project that is proposed must run a gauntlet of energy transition policies and environmental activism. This market imbalance allows OPEC to grind oil prices higher. (Cf., Petrucci and Bereznicki, “Oil and Gas …”)

Increasing oil price projections. With these factors in mind, Canaccord Genuity analysts have increased their oil price assumptions. They are now modelling US$70/bbl WTI through the remainder of 2021 (vs. US$57.50/bbl previously) and US$67.50/bbl for 2022 (vs. US$55.00/bbl previously). (Cf., Petrucci and Bereznicki, “Oil and Gas …”)

Natural gas outlook remains bullish. While North American natural-gas demand hovers around the high end of the five-year range, gas-focused drilling activity in both Canada and the U.S. remains below the five-year averages. With less drilling leading to reduced supply, our analysts are optimistic that natural-gas prices will remain strong and have, therefore, increased their NYMEX pricing assumptions to US$3.25/mcf (from US$2.75/mcf) for the remainder of the year and to US$3.00/mcf (from US$2.75/mcf) for 2022. (Cf., Petrucci and Bereznicki, “Oil and Gas …”)

Oilfield Services are late to the party. The fundamentals of the Western Canadian Sedimentary Basin (WCSB) are expected to improve throughout the balance of the year as oilfield activity recovers off its 2020 lows. Growing operator confidence in the commodity price recovery should continue to drive activity gains through 2022. However, our analysts also note that the pace of this recovery will be dampened by demands for producers to live within their cash flow. (Cf., Petrucci and Bereznicki, “Oil and Gas …”)

Midstream will continue to be healthy. In addition to supporting increased production and stronger frac spreads, improved oil-and-liquids pricing will continue to reduce counterparty risk for midstream service providers like pipelines and waste-management companies. (Cf., Petrucci and Bereznicki, “Oil and Gas …”)

Expect the Canadian energy industry to continue to run for the rest of 2021 and into 2022. Please contact me at dgraham@cgf.com or 780-408-1518 for a few stocks that should run with it.