Declining Canadian Oil Prices are a Blessing in Disguise

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At a time when U.S. oil companies continue to post vastly improved operating and financial results, the situation across the border is less upbeat. In fact, Canadian oil companies have been at the lower end of the market lately.

Canadian crude oil prices have been suffering from transportation infrastructure bottlenecks and declining import requirements from the U.S., which has been the biggest customer of Canadian oil. As a result, Canadian oil stocks such as Canadian Natural Resources (NYSE: CNQ), Suncor Energy (NYSE: SU), and Cenovus Energy (NYSE: CVE) have all lost more than 10 percent over the last 12 months.

However, it may be a blessing in disguise for value investors. Here is how:

Canadian Natural Resources, the country's largest oil producer, recently announced plans to divest or find partners for parts of its vast Montney Shale holdings in the Northeast of the Canadian province of British Columbia.

Though this may not be such an important development for many, it is something of a watershed as the company has traditionally avoided partnerships in order to maintain a high level of control. This offer of sale or joint venture comes on the heels of the company reporting a 12.3 percent decline in revenue in the latest quarter ended December. The drop in revenue came despite higher production and led to more than a 57 percent erosion in quarterly profits.

This dismal financial performance demonstrates how much pressure the company has come under. However, it is not that the company is devoid of merit. Despite all the shortcomings regarding the infrastructure, the Montney Shale is an attractive target for foreign and North American investors alike. This was highlighted by ExxonMobil's $1.6 billion acquisition of Celtic Exploration last month.

Suncor Energy has also been affected by the factors that are credited for grounding Canadian Natural Resources. The effect of these factors has been pronounced in the case of Suncor Energy, as the company swung to a massive loss of $562 million in the latest quarter, compared to a profit of $1.4 billion a year ago.

While results in the latest quarter were adversely impacted by a writedown on its Voyaguer project, there is no doubt the company is suffering from transportation bottlenecks. The stock may continue its sideways movement into the future, but one needs to ask if the transportation situation will continue as it is today--and the answer is no.

There are already some solutions in the offing, including the Keystone XL pipeline, which aims to connect Alberta to Nebraska. Despite gaining support from environmental groups, the project is making headway in highlighting its potential economic benefits to policymakers.

Cenovus Energy is another Canadian oil major that has fallen to bad times. With a large number of oil sands projects between Foster Creek, Cristina Lake, and Narrows Lake, the company is already one of the largest in the space. However, depressed Western Canada Select prices caused a 14 percent drop in Cenovus Energy’s revenue in the latest quarter, despite the company managing to increase production.

As a result, the company moved into the red with a loss of $118 million in the quarter, compared to a profit of $266 million a year ago in the same period. Cenovous expects that the majority of its projects will come on stream by 2020, while refining operations will continue to support operations in the meantime.

Overall, the biggest hurdles for Canadian oil companies remain the transportation bottlenecks, and while these are unlikely to go away in a hurry, discounted entries in these stocks are something of a positive for investors considering some decent long term bets.


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