Canada's Exports to America Will Not Disappear

By Joshua Bondy - January 3, 2013 | Tickers: XOM, SU, TOT | 0 Comments

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Recently a report came out by the International Energy Agency that stated the U.S. may become energy independent. In little time, mainstream publications were heralding the end of U.S. oil imports. If this were to come to pass then Canadian oil producers would face a very bleak future, as the majority of Canadian energy exports are sold to the U.S. The reality is that this situation is highly hypothetical and investors would be wise not to place too much weight upon a single report.

America's Energy Information Agency has published the early release overview of the Annual Energy Outlook 2013. This report is produced by the U.S. Government, and as such it is reasonable to expect that the authors have a strong understanding of America's energy situation. The projected imports in their 2013 report have decreased by a couple percentage points relative to previous year, but they still project net liquid fuel imports of 7.08 mbd and 7.06 mbd in 2025 and 2035. This chart by crudeoilpeak.info shows how the earlier IEA reports make very generous predictions about the future tight oil supply while the EIA has remained more conservative. Widely optimistic predictions can generate a large amount of press interest but more realistic assumptions see a continued role for U.S. oil imports.

The Suncor Situation 

SU Return on Invested Capital data by YCharts

In the short term it is easy to have a negative outlook on oil sands producers like Suncor Energy (NYSE: SU). The energy boom in the U.S. has decreased pipeline space and now some companies are forced to pay very high transportation costs in order to get their oil to refineries. The environmental and political objections to Enbridge's Northern Pipeline from Alberta to British Columbia to sell oil to Asia show just how difficult it can be to reorient Canada's away from the U.S. In addition, the media continues to discuss how the U.S. may be a net oil exporter soon. 

A look at Suncor's fundamentals is more encouraging. The firm has a low total debt to equity ratio of .26 and their cash operating costs in the oil sands are very reasonable at $35 per barrel. They have a number of new developments in the oil sands and elsewhere in order to meet their goal of growing production by 8% per year. The gross margin of 53.4% and profit margin 12.3% are strong.  Suncor is a powerful player in the Canadian oil industry, and as more midstream infrastructure is developed it will continue to grow.  Its low cost operations and decades of experience give it a clear advantage in the industry. 

Suncor's Partners

Exxon Mobil (NYSE: XOM) and Suncor are involved with the Hebron field off the coast of Newfoundland. The project recently received provincial approval and is expected to start producing before the end of this decade. At 150,000 bpd the project will not be enormous, but it will help to counteract the decline in Canada's traditional fields. The partners are Exxon Mobil at 36%, Chevron at 26.7%, Suncor 22.7%, Statoil at 9.7%, and Nalcor Energy at 4.9%. XOM's development in Canada shows how it continues to see imports playing an important role for America's energy portfolio. XOM's gross margin of 34.7% and profit margin of 9.4% are not as high as Suncor's, but they are healthy. At current prices, XOM trades at a P/E ratio of 9.5 and a yield of 2.6%, which make the firm attractive as a long term buy-and-hold investment. 

Total SA. (NYSE: TOT), Suncor, and Teck Resources are all involved in the Fort Hills Oil Sands project. The capacity of this facility is planned to grow by 67 kbpd over the coming years. Total is the major French energy firm, and just like Exxon Mobil it is looking beyond the U.S. to supply America's energy needs. Total does not have the clout of XOM but it has a $118 billion market cap and a strong presence in the refining sector. With a gross margin of 30.5% and a profit margin of 5.9% Total does not look as attractive as XOM. Also, their total debt to equity ratio of .48 is the highest of any of the companies examined here. France has a number of issues, and if political instability were to befall the nation Total would bear some of the effects. It is a company worth watching as Europe continues to resolve the Euro crisis and the political instability associated with Total starts to decease. 

Conclusion

It is easy to overestimate the future and confuse precision for accuracy. In the strictest sense no one can predict with certainty if the U.S. will become a net oil importer. Look beyond the IEA report to the EIA, the idea of the U.S. becoming a net oil exporter appears less probable. The most likely scenario is that the Canada's oil sands will continue to play an important role in meeting America's energy needs. Suncor, Exxon Mobil, and Total all offer interesting ways to invest in America's oil imports, but Suncor is the strongest pure play. 

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