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Risk Assessment: Canadian Oil and Gas Producers

By Roger S. Conrad on Dec. 4, 2014

Canadian oil and gas companies have experienced their fair share of hard times over the past half decade, starting with natural-gas prices dropping from depressed levels to ultra-depressed levels.

At one point in summer 2012, natural gas at the AECO hub in Alberta plunged below US$1 per million British thermal units—a price point where only handful of tiny producers could make money.

(Click graph to enlarge.)AECO Hub Spot Gas Prices

In this environment, high-cost developments quickly became uneconomic, forcing producers to take their medicine and shut in wells. Meanwhile, the battle-hardened survivors can hold their own in the lean times and thrive when the supply-demand balance turns in their favor.

Investors can buy these stocks with confidence when the market turns against them and collect a steady dividend while they wait for a potential upswing.

Canada’s liquids-focused producers have endured similar hardships, with the price of Western Canada Select (WCS) crude oil trading at discounts to West Texas Intermediate as wide as US$40 per barrel.

Temporary refinery outages contributed to these blowouts, but insufficient takeaway capacity is at the heart of this persistent weakness; production has overwhelmed existing pipelines to transport volumes to the US.

Whereas US producers generally have enjoyed elevated oil prices in recent years, their counterparts in Alberta have weathered severe downdrafts in WCS to as low as US$40 per barrel.

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