CALGARY - Global investors are likely to remain cool on Canada's oil patch, despite expectations of rapid gains in output, as they worry about economic risks and a squeeze on pipeline capacity that will keep pressure on crude prices, an analyst said.
Canadian energy shares, down 11 percent in the past year, face several months to a year of more weakness due to a combination of factors that also includes depressed natural gas prices, CIBC World Markets analyst Andrew Potter said in an extensive report into North American energy market conditions.
The one thing that could improve the market outlook is a wave of takeovers, however, Potter said. There have been indications of that, with the $15.1 billion takeover bid for Nexen Inc by China's CNOOC Ltd and a recently increased C$5.2 billion offer for Progress Energy Resources by Petronas of Malaysia.
He wrote that much of the macroeconomic uncertainty, including the European debt crisis and a murky Chinese outlook, could already be priced into Canadian stocks.
"However, the general negative backdrop with increasingly limited growth visibility and rising pipeline/differential risk means that global investors are unlikely to flock back to Canadian oil and gas exposure anytime soon -- unless we see the recent flurry of M&A turn into a full blown wave," he said.
The Toronto Stock Exchange energy group, which includes shares of such big names as Suncor Energy Inc, Encana Corp and Talisman Energy Inc, was at 259 points on Thursday, down from 291 a year earlier and 367 in early 2011, even as forecasts for oil output remained high.
Production of Canadian unconventional light oil, aided by the booming use of horizontal drilling and hydraulic fracturing techniques, could increase by as much as 10 percent, or 100,000 barrels per day, annually, hitting 1.65 million bpd by the end of the decade, according to the report.
Oil sands production, meanwhile, could climb by 270,000 bpd annually through 2020, unless the macro conditions prompt some big players to scale back plans for megaprojects.
The problem is limited capacity to move it to market, Potter said. He said production could bump up against pipeline capacity as early as 2014, which would further depress the price of Canadian crude versus U.S. and international benchmarks.
Western Canada Select heavy crude blend slumped to the mid-$30s a barrel under West Texas Intermediate last winter and sold for $14.75 below the benchmark on Thursday.
He pointed out pipeline proposals for shipping crude out of Western Canada total about 2.9 million bpd, though some, including Enbridge Inc's 525,000 bpd Northern Gateway pipeline and Kinder Morgan's 450,000 bpd Trans Mountain expansion to the West Coast, face growing political risk amid opposition by environmental groups, many aboriginal communities and some politicians.
Potter pegged the odds of those proceeding at 50-50.
TransCanada Corp has proposed converting some of its Eastern Canadian gas pipeline network to oil to get Canadian crude to Quebec and Atlantic Canada refineries, but the concept is in its early stages.
"Overall, Canada needs pipe and lots of it to avoid the opportunity cost of stranding over a million barrels a day of potential crude oil growth," he said.