This week has brought the energy sector a bounty of good news that’s not been in evidence for more than 18 months.
Not only did oil prices break US$51 per barrel Wednesday, for both WTI and Brent crude, Suncor Energy announced a $2.5-billion equity deal that’s since been oversubscribed, Seven Generations saw its senior debt ratings upgraded and economist and energy historian Daniel Yergin, at a Canada 2020 event in Ottawa, declared the worst is over for the energy sector.
No wonder, then, that the S&P/TSX Energy Index has gained more than 20 per cent since the start of the year.
It all makes for a welcome respite from the pervasive gloom and doom that has dominated headlines and the collective psyche of what remains the largest industry in this country.
As ARC Financial’s Peter Tertzakian reminded delegates at the annual Institute of Corporate Directors conference in Calgary last week, Canada’s oil matters not just to the country, but to the world.
Without Canada’s production — which accounts for 3 to 3.5 per cent of world’s supply — there would be serious consequences in terms of price.
Moreover, Canadian energy is responsibly developed relative to other jurisdictions that supply North American refineries, including those on Canada’s East Coast.
“In a reasonable year … with prices in the $60 to 70 US range, (the energy sector) contributes $100 billion-plus in revenue. To put it perspective, agriculture is about $10 billion, mining is about $50 (billion) to $60 billion, uranium is about $1 billion, furs are about $1 billion. It matters across the country on many dimensions in terms of economic measures,” said Tertzakian.
In other words, to have an industry as economically dominant as energy so dramatically compromised as it is today — and that’s before the full impact of the Fort McMurray fires — it’s no wonder Bank of Canada Governor Stephen Poloz has been cautious, even downright gloomy, on the country’s economic prospects.
To see a financing issue the size of Suncor’s, which will be used to pay for the recent $937-million acquisition of Murphy Oil Corp.’s five per cent Syncrude stake, is an encouraging signal of a fundamental change in market sentiment.
Not only is it another indication that investors are willing to get back into the sector, it suggests Suncor has not precluded further acquisition opportunities.
While TransCanada Corp.’s $4.5 billion equity issue earlier this year — in conjunction with its acquisition of Columbia Pipeline Group — was the largest bought deal in corporate Canada, the Suncor deal is the largest ever done by an oilsands company in Canada.
One question in the wake of Suncor’s issue is whether it saturated the buying power in the market for energy companies.
However, if there is confidence that the worst of the oil price slump is over, as Yergin suggested, Suncor won’t likely be the only energy company in the market, with more equity deals coming before the end of the second quarter.
Yergin’s analysis is based on growing global demand and the pull back in investment. His firm, IHS, has estimated energy projects valued at $1.6 trillion have been cancelled through 2019.
You can’t count out the impact of U.S. economic data on oil prices — or any other commodity priced in US dollars.
Surprisingly weak American job growth numbers released last Friday has pushed an interest rate hike by the U.S. Federal Reserve further into 2016, if it happens at all this year. This effectively caps the appreciation of the greenback, which is good for oil prices because the cost per barrel is cheaper in relative terms.
It also suggests oil demand should increase beyond first-quarter numbers — which already surprised the market in terms of strength. Despite the fuel efficiency regulations in place south of the border, U.S. gasoline demand is at record highs.
The one caveat in this currency-linked argument is what happens in Britain with respect to its June 23 referendum on remaining in the European Union. There is significant speculation a ‘Brexit,’ as it’s been dubbed, would have a negative impact on the British pound, which could in turn benefit the greenback and have a negative impact on oil prices.
Picking up on Yergin’s comments — and adding the cautious optimism that’s been bolstered by the Suncor equity deal — it’s getting easier to buy into a more optimistic outlook for the energy sector. Even natural gas futures are through $3 per thousand cubic feet.
There’s still uncertainty around how companies will respond, what the time to re-investment looks like and what the magnitude will be. There is no doubt re-establishing balance sheet strength remains the priority.
Adding noise to the space is the uncertainty relating to everything from gaining access to tidewater, the impact of climate policy and the Fort McMurray wildfires.
Finally, despite the fact American energy producers continue to be profoundly challenged — Devon sold $1 billion worth of assets earlier this week as part of its $3-billion divestiture program — there are expectations U.S. production will grow in response to the relative strength in oil prices as drilled but uncompleted wells will be completed and tied in. This has the potential to put a measure of downward pressure on prices.
It’s been a while since there has been some good news in the energy space — even with Vancouver Mayor Gregor Robertson’s recent opposition to Kinder Morgan’s Trans Mountain pipeline expansion project.
Three good days don’t necessarily indicate a sustainable trend, but it seems the sector has reached an inflection point.