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Morningstar | Pipeline Expansions Are Canada's Lifelines

Canada’s oil supply continues to surpass expectations, and aided by technological advancements, namely solvent-assisted technology, there is no shortage of economic growth opportunities. But pipelines are operating at maximum capacity, leaving few options to move new supply out of the country. To make matters worse, needed expansion projects continue to hit road bumps. With limited market access, Canadian crude sold at record lows during the fourth quarter of 2018. To combat low prices, Canada’s producers have turned to crude by rail, and the Alberta government ordered mandatory short-term production cuts. To date, Canada’s heavy oil prices have rebounded, but the measures taken are a mere Band-Aid to a larger wound. Unless new pipes are built, Canada will continually suffer from low prices and won’t be able to tap into its vast resource potential.

Fortunately for Canadian producers, we anticipate that all three of the major pipeline expansion projects will be placed into service by the end of 2022, but the window is narrowing for the Keystone XL. Once the projects are in service, Canada will have enough cost-efficient infrastructure in place to compete with other global supply sources at the top of the cost curve. Accordingly, we expect Canada to add supply of 1.3 million barrels of oil per day over the next decade, with more than 90% of that coming from oil sands production. In the world of Canadian infrastructure, wide-moat Enbridge sticks out as our top pick. Our top Canadian E&P pick is Cenovus Energy, which will be a major player in the new cost-lowering extraction technology. Owing to our differentiated Canadian outlook, both stocks trade at significant discounts to our fair value estimates.

For a deeper look into the Canadian crude market and the investment implications, please refer to our January 2019 Energy Observer Pipeline Expansions Are Canada's Lifelines.