From BNN
North American crude oil prices are finally hovering near the US$60 per barrel mark – for the first time in more than two years – but most Canadian prices are nowhere even close to that level.
The vast majority of Canadian oil output comes from the oil sands, which trades at a discount to the North American benchmark price because it is more expensive to refine and amid a lack of pipeline options to get it all safely and quickly to market. Right now, that discount is roughly US$27 per barrel or nearly twice as much as the US$15 per barrel historical average, meaning Canadian oil sands producers can expect to make just US$33 for every barrel they produce whenever the continental benchmark breaks above US$60.
If you’re looking for a reference case, consider MEG Energy. All of its assets are based in the oil sands and is therefore an example of an oil sands producer directly exposed to Canada’s heavy oil discount. While this puts the company in dire straits when the discount is as large as it is today, it also gives the stock higher leverage to rising oil prices.
While some producers have no choice but to take whatever price the market has set for their products, others have found various ways of becoming less beholden to the price fluctuations of a single grade of crude oil. Below, BNN takes a look at a few of them.
SUNCOR ENERGY
Easily among Canada’s largest oil sands producers, Suncor’s (SU.TO 0.13%) inclusion on this list may be a surprise to some. However, a quick look under the hood reveals a more diverse asset mix than many might expect. The company’s majority share of Syncrude gave it 159,100 barrels per day (on average) of synthetic oil production in its most recent quarter, which tends to sell for as much or occasionally even more than North American benchmark prices. Suncor also gets more than 100,000 barrels of daily production from assets as far afield as the United Kingdom and Libya, which command among the highest crude oil prices in the world.
TOURMALINE OIL
Outside of the oil sands, Tourmaline (TOU.TO 0.79%) is among Canada’s most valuable crude oil producers. Most of its production is based in the Deep Basin formation that straddles British Columbia and Alberta and usually sells for at – or close to – North American benchmark prices. To wit: the company managed to realize an average of $57.17 per barrel crude oil price in its most recent quarter. Most of the company’s production is in the form of natural gas, with more than 1.3 billion cubic feet of daily output, giving Tourmaline exposure to commodity prices that have decoupled from crude oil in recent years.
VERMILION ENERGY
Possibly the least Canadian of Canada-based crude oil producers, Vermilion (VET.TO 1.13%) only has roughly 40 per cent of its production coming from North America — and most of that is from southern Saskatchewan and the United States. Half of its production comes from Europe, where significantly higher natural gas prices and the ability to sell crude oil production at Brent prices — often the world’s highest crude oil price – provide a key source of diversification.
BAYTEX ENERGY
Barely five years ago the Baytex Energy (BTE.TO 1.36%) story would have been rather similar to that of MEG Energy, in that most of its production was heavier-grade crude. While its discount was less steep than the prices applied to oil sands production, Baytex was nonetheless facing similar problems. That all changed in 2014 when the company agreed to pay $1.8 billion for Aurora Oil & Gas, making Baytex a major player in Texas shale production. Today, only 36 per cent of the company’s total production is heavy crude while 43 per cent is higher-priced lighter crude. The rest is natural gas.
