Discount oil patch crude makes producers a bargain

1/30/2013

Cut-price Canadian crude has made some of the nation’s producers look like a bargain. At $64 (U.S.) a barrel, the nation’s oil is the cheapest on the planet. It has fallen 25 per cent over the past year and in recent months settled around a whopping $50-a-barrel discount to Brent crude and $28 a barrel below American WTI – though it briefly dropped further.

A dwindling list of options for transporting the country’s crude has driven the drop. But the selloff in the shares of Canada’s oil giants looks overdone.

Canadian Natural Resources and Meg Energy have both lost around a quarter of their market value over the past 12 months. That might sound reasonable considering the drop in the price of the country’s crude. But shares in U.S. rivals have climbed over the same period, with Chevron up 12 per cent, even though America’s own infrastructure issues have helped push the price of a barrel of its WTI crude $17 below Brent.

Transport problems are particularly acute in Canada, though. Existing pipelines have been plagued by a series of leaks and power problems, delaying deliveries. A drought has compromised the capacity of the Mississippi to carry oil. And the Obama administration yet again delayed plans to build the 2,700-kilometre-long Keystone XL pipeline. On top of that, U.S. refinery outages have curbed demand.

Most of these, though, are short-term problems and ought to abate. Let’s assume that would erase at least $10 a barrel from Canadian oil’s current $28 discount to American WTI, taking it closer to its three-year average.

This modest reversion would boost 2013 EBIDTA at Canadian Natural Resources by $1-billion to around $9-billion, according to Morningstar. Applying its current enterprise multiple of five times expected EBITDA to a narrower discount would justify a 10-per-cent jump in the stock. If investor optimism boosted the EV multiple to, say six times EBITDA – still below its average multiple since 2009 of seven times EBITDA – it would leave the company’s shares poised for a 35-per-cent boost from their current level.

It may be years before Canadian producers get the global price for their oil. But shareholders are assuming too much gloom.

(Globe and Mail)