BAY STREET-Full pipelines to cut into oil producers' profits

Sun Jan 13, 2013 10:29am EST

* Weak Canadian oil prices cut into producer profits
    * Lack of pipeline space lowers prices
    * Heavy oil producers take biggest hit
    * Refiners benefit from low oil price

    By Scott Haggett
    CALGARY, Alberta, Jan 13 - Canada's independent oil
producers may face months of depressed earnings and weak share
prices as they jockey for space on the country's over-full oil
pipelines. 
    The independents, companies that focus on producing oil and
gas and have no refining or marketing operations, are being
squeezed by a shortage of export capacity as rising heavy oil
production from the Alberta oil sands strains pipeline capacity,
trapping oil in Canada and pushing down prices.
    While North American benchmark oil prices remain relatively
robust near $95 per barrel, Canadian prices have tanked, with
the Western Canada Select heavy crude trading at more than $41
per barrel below the West Texas Intermediate (WTI) 
standard on Friday.
    That cuts into producers' cash flow and profits, with a
likely knock-on impact on shares that have already fallen
sharply over the past three months. 
    "The shortfall in take-away capacity is absolutely going to
weigh on realized prices for the Canadian producers over the
near term on both heavy and light oil," said Chris Feltin, an
analyst at Macquarie Research. "But especially heavy oil, which
is at a pretty substantial discount to WTI right now ... It's a
challenging market for Canadian upstream crude producers."
    Canada is the largest source of U.S. oil imports, shipping
as much as 2.5 million barrels of crude per day to refineries
primarily located in the Midwest. 
    The lack of pipeline capacity became acute in the fourth
quarter of last year, as Enbridge Inc carried out
maintenance on the pipeline network that carries the bulk of
Canada's crude exports and refinery maintenance shutdowns in the
Midwest capped demand. 
    Over the fourth quarter of 2012, the Toronto Stock
Exchange's energy index dropped 5.3 percent as shares of the 
oil producers fell. Canadian Natural Resources Ltd, the
largest independent, fell 7.5 percent over the period while
other heavy oil producers also suffered. 
    MEG Energy Corp's stock was down 19 percent over
the period, Penn West Petroleum Ltd shed 22 percent and
Baytex Energy Corp dropped 8.6 percent. And conditions
are not improving - pointing to an even weaker first quarter as
Canadian prices continue to weaken.
    "If this persists it really points to (the first quarter) as
being a really, really ugly quarter for heavy oil producers,"
said Andrew Potter, an analyst with CIBC World Markets.
    The problems are not going to go away quickly. Heavy oil
production is set to rise further, with Imperial Oil Ltd
 expected to open its 110,000 barrel-per-day Kearl oil
sands mine within weeks.
    But no additional pipeline space is expected until the end
of March, when Enbridge plans to add 50,000 barrels per day of
space on its Line 5, which runs from Superior, Wisconsin, to
Sarnia, Ontario. 
    To cope with the lack of space, companies are looking to
alternatives to pipelines. Costly rail shipment has become
increasingly popular, allowing oil producers to tap the most
lucrative markets even if they are not served by pipelines and
to avoid blending their crude with the expensive diluent needed
so that it can flow on pipelines. 
    Other producers are broadening the number of pipelines they
use. Canadian Oil Sands Ltd, Syncrude Canada Ltd's
largest shareholder, said this week it is booking space on 
several pipelines in the United States and Canada to ensure
access to sufficient capacity to ship its oil.    
    "We are hedging and making sure we are going to have pipe
capacity for most of our product as we get through what will
continue be a couple of tough years here in 2013 (and) 2014,"
Marcel Coutu, the chief executive of Canadian Oil Sands, said at
an investment conference on Tuesday.
    However the producers' pain is others' gain, and the
refining sector is seeing windfall profits from low feedstocks
costs, bringing potential stock price gains. 
    "The companies that outperformed (in 2012) are the refiners,
the integrated companies in Canada," Feltin said.
    Indeed, while producer shares waned over the fourth quarter,
the integrated companies, which combine production, refining and
marketing, were less badly hit. Shares in Suncor Energy Inc
 were flat over the period, Imperial Oil shares dropped
6.3 percent and Husky Energy Inc's stock rose 9.7
percent.
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