Oilpatch crisis leaves investors with dilemma as losses mount

Historically low prices for Canadian oil have unfairly punished the country’s energy companies, according to those who follow the sector, and that is leaving battered investors who have watched the losses pile up with a difficult decision on their hands. “I think there’s good opportunity to be had but you have to be careful you’re not grabbing a knife that’s pretty sharp and falling rapidly because it hurts,” said Martin Pelletier, portfolio manager at TriVest Wealth Counsel Ltd. in Calgary. The price for Western Canada Select, the country’s heavy crude, hit its last major peak this year on July 13, when prices reached US$54.74, before falling more than 70 per cent to reach a record low of US$13.46 on Nov. 15. While the price has since rallied somewhat and closed at US$16.43 on Tuesday, that is still less than a third of the year-to-date high of US$57.99, reached in May. The decline has far outpaced that of the U.S. benchmark, West Texas Intermediate, which declined another six per cent on Tuesday and now sits at US$53.39, down from US$71.03 on July 13. The differential has led to a sharp pullback for Canadian energy stocks, many of which had already been stagnating despite impressive third-quarter earnings reports. Despite being protected from low Canadian oil prices, downstream companies such as Suncor Energy Inc. and Imperial Oil Ltd. have seen their share prices fall by more than 19 per cent and 11 per cent respectively since July 13. The pain has been amplified for upstream firms such as EnCana Corp, whose shares are down 46 per cent in the same time period and Cenovus Energy Inc, which has been subject to a 28-per-cent decline. Eric Nuttall, the senior portfolio manager for Toronto-based Ninepoint Partners LP, said he’s still bullish on oil and continues to have outsized weightings in companies such as Athabasca Oil Corp. and Baytex Energy Corp. Nuttall said he’s optimistic that a pipeline — either the Keystone XL or the Trans Canada pipeline — will eventually be built. “And if you’re a believer in that, there’s significant and meaningful upside in Western Canada Select exposed names,” Nuttall said. Most analysts agree that the reason prices are plunging is an excess of supply that cannot be sent to market due to a lack of pipelines. Plans have been approved to replace Enbridge Energy’s Line 3 pipeline, but the Trans Mountain pipeline and Keystone XL remain in limbo. The discount, according to Alberta Premier Rachel Notley, is resulting in Canada losing $80 million per day, but the debate over how to address the problem has been complicated by diverging interests within the industry. Cenovus CEO Alex Pourbaix has suggested that oil firms cut down on output, but that proposal doesn’t sit well with downstream companies such as Suncor and Husky Energy Inc., which don’t want to shut off the taps because they’re not as exposed to the discounts. One way to solve the disagreement, Pelletier said, would be for companies to form an oligopoly and learn to act as a unit for important issues. “And if nothing comes of that, then you have to bring the hammer down,” he said, meaning a forceful intervention from Notley. Both Cenovus and Canadian Natural Resources Limited have called for government intervention to find a solution. Nuttall said that he likes to think of himself as someone who supports a free market, but the reeling energy industry has made him think twice about the right response. “Given how broken the system is right now … perhaps one can make the argument that a temporary 10 per cent shut in for the next three to four months would rebalance bloated inventories,” he said.