What the opening of Trans Mountain could mean for Canada’s energy sector

What the opening of Trans Mountain could mean for Canada’s energy sector

[Music] the price of oil is down some 8% from the high it hit earlier in the year as concerns about a wider conflict in the Middle East have subsided but with risks on both the supply and demand side where does the price of oil go from here and what does it mean for the energy sector joining us now to discuss is Andrew yastreb vice president for portfolio research at TD asset management and Andrew thanks for joining us today and we’ll we’ll we’ll start with the price of oil um is this 77 to $90 trading range for oil The New Normal well thank you for having me and uh to answer it directly I think yes it’s probably the range we will continue to see in the future and we’ve seen it for about a year and a half already uh I think it’s also a range that is sustainable because it satisfies both uh uh suppliers and customers so we’ve seen last year and so far this year pretty robust demand growth so obviously $90 oil is not is not resulting in some uh declines in demand uh from supplier perspective uh it’s pretty much all about OPEC and if you think about OPEC I don’t think OPEC wants $100 plus oil their reaction function is not to maximize price of oil is to have it high enough that they will satisfy their own internal needs like balancing their budgets for Saudis UAE and a lot of other producers uh but at the same time they don’t want to incentivize adoption of of EVs and people switching away from gasoline cars and they don’t want to uh incentivize increasing uh capex and production growth in Us and other countries that they compete with so that 78090 um price range uh satisfies all of those uh and I think uh as we think over next several months it will be interesting to see how OPC and Saudis in particular think about potentially bringing back that million barrels that they uh did a voluntary cut last summer uh because uh if we see oil being in the lower end of that range Maybe they extend it and it’s positive but if you see oil again rebounding to 90 I think it’s high probability that million barrels a day would come back to the market and from that perspective I don’t think there’s too much upside in oil price from here and and from your perspective I mean you know that isn’t necessarily bad thing for oil companies how does this pricing environment set things up for oil companies generally so that that’s an interesting point right because usually when investors think about investing in oil companies they want oil prices to go 20 30 50% higher right we want the torque to commodity I think it has changed since co uh we’ve seen a couple of really strong years of returns but from here it’s not as much about oil going higher um significantly it’s more about the fact that all these energy companies have very clean balance sheets uh they have very high free Co low yields and because they don’t grow and they don’t need to invest in cap capex as much as they used to uh they can return most of that cash right so when we talking about those free cash flow yields uh for large um integrated producers um those can be in 7 8% range for a lot of smaller producers that’s 10% and above right so from that perspective having that confidence that they will be returning the cash uh back if you stay within that range that’s sustainable over time and it’s really good return through dividends and BuyBacks um and you don’t have that much risk of them going out and investing in CeX right like historically their their cycle was okay oil price is higher let’s go and drill more invest more and then oil prices crashed let’s let’s pull some of that back I think we’re a lot more disciplined now and uh I think it’s a lot more healthier environment for investors to make money over time and and compound those earnings okay let’s talk a little bit about the Canadian Market when you look at the Canadian energy sector versus us how do they differ right now so that’s another very good question uh one uh key um key Catalyst that we’ve been been waiting for years is happening and actually it’s happened literally today on May 1st uh TMX expansion uh is official operational as of this morning uh and U it’s it’s doing uh taking commercial crout and shipping it uh and soon will be filling tankers um we’ve been waiting for this for years yeah this is a big deal for the Canadian energy sector yes so what what it means is that we’ll have over half a million barrels of extra capacity to ship more products out of Canada which is great it means that Canadian producers can can grow um before it were constrained by pipeline capacity and now it will be easier to do uh to invest in growth over time uh and secondly it means that the pricing that the Canadian producers will be getting will be uh more sustainable over time we’ve seen periods in in the past where production was way above uh capacity to ship and at that those times uh Canadian Oil was traded a significant discount uh because it was hard to get oil out uh of the Basin so now as uh we get into this new regime for next few years until this pipeline is also full uh we have a capacity we have opportunity to grow and we probably have better prices as well and how long will it take do you think for that that uh capacity to I think the the estimate is about anywhere between two to 5 years I think two years is probably too aggressive looking at where the capital discipline is uh right now with with companies I don’t think they will fill it necessarily within two years 5 years is probably too long I think 3 four years um is more um more prudent estimate uh and I a second factor that I need to keep in mind for Canadian energy versus US Energy is that we Canadian energy actually benefits from weaker Canadian dollar and we’ve seen US dollar going up uh year-to dat across pretty much all uh major currencies and then we’ve seen also weakness in Canadian dollar after we’ve seen what what’s happening with Canadian budget and some weak economic data here in Canada so if this weakness continues that will be actually big uh Tailwind for Canadian producers if if you look at Canadian Oil being priced today uh in Canadian dollars for Western Canadian select it’s mid $90 in Canadian dollars and for synthetic crude oil it’s over $110 per barrel so pretty good pricing for Canadian uh Canadian Oil right now okay now I want to Pivot from oil to Natural Gas how’s this environment looking for this commodity so natural gas is an an interesting uh story because obviously you don’t have an allac control in this market and what we’ve seen in this market uh recently or last 6 months 9 months um natural gas pretty much got destroyed so uh spot natural gas prices in in US is over just under $2 per um per cubic feet and what that means is that um we’ve just seen really weak demands uh and a lot of the drive driver behind that was uh we’ve seen two really warm Winters in a row and inventories aree elevated uh on of that this winter we’ve seen warm winter not only in North America but in Europe so on both sides of Atlantic we have a situation where uh inventories are elevated uh at the end of uh heating season uh production is still quite robust and there is a risk that we’ll get to tank tops in terms of inventories by September October at which point you cannot produce more because you can cannot store natural gas so uh if you want we can bring up a chart we brought a chart up earli let’s bring it up once more and uh what this is showing is uh two things one is uh the green line uh shows today’s forward curve uh for natural gas and forward curve is basically uh price of natural gas in Futures market so you can trade natural gas for delivery next month or 6 months from now or 26 2026 28 so uh we’ve seen this weakness uh that I was talking about as that green line is below uh orange and gray line which is where that curve was six and 12 months ago but I think what’s really interesting is that uh the the the later part of that uh line in 2026 and through 20128 those prices haven’t really changed and that’s I think where it becomes really interesting for natural gas with a view of two to three to four years out is that uh we know that um in response to weak prices right now some production has been uh reduced especially in us so we had peak in production earlier this year around 106 BCF uh uh per day now we under 100 uh but then the other part of that is that we know that there’s more LG export capacity coming over next several years we have LG Canada ramping up later this year here in Canada we have also several facilities coming online in us uh and what that means that we know there’s going to be more demand uh at the time when uh and that those elevated inventories will not last forever so what the market is telling you uh right now is that spot net gas prices under $2 some marginal producers don’t make money in that environment if the it’s solid and spot uh but that 2026 through 28 price is still $4 and that expectation was there exact pretty much the same level about a year ago uh so if we if Market is correct and we go from under $2 to $4 uh I think that will be beneficial to net gas prices and the compan is involved [Music] [Music]

The Trans Mountain pipeline has officially begun to move oil from Alberta to export terminals in British Columbia’s coast. Andriy Yastreb, VP, Portfolio Research at TD Asset Management, speaks with MoneyTalk’s Anthony Okolie about the implications…