Question: Is it time to invest in Canadian oil?
Every time something serious happens in the Middle East, investors start to wonder where America's next barrel of oil will come from. Alternatives like Canada are quickly trotted out and then just as quickly the hostilities overseas cool down and life goes back to normal. America's best answer to energy self-sufficiency is to produce as much as possible right here in the United States. Relying on countries such as Canada to keep the cars and trucks of this nation moving is simply a bad idea.
For those who think it's time to invest in Canadian oil - think again. Middle East unrest or not, Canada's oil industry isn't worth betting on. Here's some reasons why.
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Keystone XL Pipeline
Who can forget actress Daryl Hannah and Eleanor Fairchild standing their ground in front of earth-moving excavators in early October. TransCanada (NYSE:TRP) was in the process of building the Texas portion of the Keystone XL pipeline that will cut through six states from the Alberta border all the way down to Houston, Texas. In January, President Obama put a halt to the pipeline's final approval until at least March 2013. Meanwhile the state of Texas has granted TransCanada the right to build despite the fact the federal government hasn't. Until the entire pipeline is built, combined with increased oil production in North Dakota's Bakken Shale, Canada's crude oil prices will drop considerably. According to consultant Bentek Energy LLP, the downward pressure on Canadian oil prices will continue through 2014. If that's the case, why would any rational investor make a bet where the profit potential in the near-term is negligible at best.
CNOOC Ltd. (NYSE:CEO), China's national oil company, is currently waiting to hear whether the Canadian government will approve its $15.1 billion takeover of Calgary-based Nexen (NYSE:NXY). China wants access to Canadian energy and this is one way to do that. The process is ongoing and a prediction at this point is difficult given the government is simultaneously revising its foreign investment guidelines. Ed Morse, head of commodities research for Citibank, appeared on CNBC November 24 suggesting that Canada's pipeline politics is even worse than what's happening in the United States. Canadian MP Justin Trudeau, son of the late Canadian Prime Minister Pierre Trudeau, favors the $15 billion takeover but is against the Northern Gateway pipeline that Enbridge (NYSE:ENB) wants to build from Edmonton, Alberta, west through British Columbia (B.C.) to Kitimat on the Pacific coast. The people of B.C. generally oppose any pipeline that cuts through the interior and threatens its coast line.
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Therefore, most of the production from the oil sands will have to continue heading south to the U.S. In the third quarter, Nexen's interests in the oil sands generated revenue of C$331 million and operating loss of C$30 million. In contrast, Nexen's conventional oil business in the United Kingdom generated C$1.2 billion in revenue and C$616 million in operating profits. However, in terms of assets, the oil sands represents almost 49% of Nexen's overall total making the government's decision very contentious. China may want Canadian oil but until someone can figure out how to safely transport it to tankers on the West coast, it really doesn't matter how much oil is hidden in the tar sands.
Oil Sand Profits
According to ForestEthics Advocacy based out of B.C., 71% of the oil sands production is foreign owned. In addition, over 50% of the oil and gas revenue in Canada flows to foreign businesses. You might think you're investing in a Canadian company when you buy shares in Nexen or Canadian Natural Resources (NYSE:CNQ) given their head offices are located in Calgary, Alberta but you'd be wrong. Nexen and CNQ have foreign ownership of 70 and 59% respectively. Suncor Energy (NYSE:SU), Canada's largest oil sands producer and also one of the oldest in the industry, is 57% owned by foreigners. Given none of the major players in the oil sands are actually Canadian owned, it seems pointless to invest in a so-called Canadian company when you can get plenty of exposure to Canadian oil by buying shares in one of the global players such as ConocoPhillips (NYSE:COP), Exxon Mobil (NYSE:XOM) or Total SA (NYSE:TOT). You get some of the exposure with less risk.
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The Bottom Line
As I said earlier, if pipelines don't get built east, west and south of the oil sands, it won't matter how much bitumen can be extracted from deep under the surface. Investing in Canadian oil is a bet that all the major pipelines on the table will get the go-ahead in the months and years to come. In my opinion that's anything but a sure bet. If you must invest in Canadian oil, do it through a multinational. It's safer and smarter.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.
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