Canadian energy sector feels the fallout of attack on Saudi Arabia

Higher oil prices spurred by an attack on Saudi Arabian oil facilities boosted the Canadian energy sector on Monday but are expected to result in higher fuel prices for consumers.

The index that tracks leading energy company share prices on the Toronto Stock Exchange closed up 9.25% at 147.9 (but still down by 25% compared with its 52-week high set last October) as U.S. benchmark oil prices finished the day ahead by more than 12%.

Double-digit increases were posted by energy firms including Baytex Energy Corp. (up 16.5%), Encana Corp. (up 16.3%), MEG Energy Corp. (up 13.8%), Canadian Natural Resources Ltd. (up 12.8%) and Cenovus Energy Inc. (12.0%).

“Our view was that Canadian oil and gas companies were inexpensively priced before. What we're seeing now is a movement in the oil price, not just at the front end of the curve but also really out through calendar '20 and '21, which really just means we're seeing a bit of risk premium creep into the oil price,'' said Randy Ollenberger, managing director of oil and gas equity research at BMO Capital Markets.

Stronger global oil prices are expected to continue to be supported even if the Saudis are able to restore production quickly, translating into more cash flow for energy companies to invest going forward, he said.

Higher oil prices could raise average gasoline prices in Canada by between five and 12 cents per litre over the next two weeks, depending on how long Saudi Arabia production is affected, said Patrick DeHaan, head of petroleum analysis for GasBuddy.

Last week, eight energy companies were dropped from the main Toronto Stock Exchange index because their market valuation had fallen below the minimum level for inclusion.

The cuts included Canada's two largest drilling companies - Ensign Energy Services Inc. and Precision Drilling Corp. - as lower producer spending has translated into fewer wells being drilled.

Analysts blame the lack of investor interest in Canadian energy companies on the uncertain future of pipeline access to markets, a factor cited by the Alberta government to continue to constrain crude production this year.

“Part of the irony is we could be producing a million barrels a day more by now had we had some of these pipelines, and that certainly would have helped deal with some of the lost volumes here with the outage,'' said Ollenberger.

The Saudi outage serves as a reminder to oil customers around the world of the political uncertainties in Middle Eastern countries, said Bob Schulz, a business professor with the Haskayne School of Business at the University of Calgary.

The situation will enhance the reputation of Canadian oil, he said, and may spur Canada's main customer, the United States, to redouble efforts to ensure stalled cross-border pipelines like Keystone XL are approved and completed.

In Washington, U.S. President Donald Trump said he had approved the release of U.S. strategic petroleum reserves "if needed'' to stabilize energy markets. He later said expanding domestic energy output meant the U.S. doesn't need Middle East oil.

It remained unknown on Monday how long it will take Saudi Arabia to bring production back.

“A worst case scenario—with profound implications for the global economy—is a broader regional conflict that puts Gulf oil production, processing and transport in the crosshairs,'' said Bill Farren-Price, director of RS Energy Group, in an emailed statement.

Short-term affects in Canada will likely be muted, said CEO Allan Fogwill of the Canadian Energy Research Institute, noting that other OPEC countries have surplus capacity they can bring on and oil will be brought out of storage.

More pipeline or rail access to markets is needed to allow growth in the Canadian energy sector, said Richard Masson, an executive fellow at the University of Calgary's School of Public Policy.

“Higher prices are a good thing but most of what companies have been doing with their cash flow these days is paying down debt or buying back equity,'' he said.

“It should strengthen balance sheets and is probably good in terms of tax and royalty (revenue) but I don't think it has a meaningful change to investment levels or jobs.''