MEG Energy: Discount on Canadian oil to shrink for 'years to come'

MEG Energy (MEG.TO) expects better Canadian heavy oil prices for “years to come”, thanks to the newly operational Trans Mountain pipeline expansion (TMX). RBC Capital Markets says the oil sands producer’s cash flow is among the most sensitive to higher prices.

Erik Alson, Calgary-based MEG’s vice-president of marketing, is the latest Canadian oil patch executive to praise the basin’s first major expansion of pipeline capacity in over a decade. The industry hopes the bigger artery from Alberta to the B.C. coast will end years of depressed Western Canadian Select (WCS) prices by improving access to global markets.

Canadian crude trades at a discount to the U.S. benchmark West Texas Intermediate (CL=F) due to its heavier grade and transportation costs.

“With this critical infrastructure now complete, we anticipate that light-heavy differentials remain narrow for a year while egress remains unconstrained,” Alson told analysts on MEG’s post-earnings conference call on Tuesday.

He estimates it could take about six years for the industry to max out the new 890,000 barrel per day capacity of TMX.

“Before TMX fills, I think you will see additional egress from an Enbridge Mainline expansion,” Alson added. “While I don’t see another pipeline being built, I believe there’s de-bottlenecking of other existing pipelines that will occur.”

Last month, RBC analyst Greg Pardy hailed the nearly 600,000 barrel per day TMX as a “game changer set to substantially boost Canada’s oil export capacity and afford oil sands producers global market optionality.”

“Prevailing WCS-WTI spreads of around US$12 have narrowed in concert with TMX’s call for line-fill of 2.1 million barrels in each of April and May, but could dip into the single digits in the second half of 2024,” he wrote in a note to clients.

Pardy picks MEG and Athabasca Oil (ATH.TO) as companies in the sector that are the most cash flow sensitive to changes in WCS-WTI spreads. He identifies Suncor Energy (SU.TO)(SU) as the least impacted in the bank’s coverage universe.

Toronto-listed MEG shares were virtually flat as at 11:05 a.m. ET on Tuesday, losing 0.92 per cent to $31.27. The stock has climbed more than 51 per cent over the past 12 months. Pardy maintains an "outperform" rating on the stock and a price target of $39 per share.

MEG reported first-quarter financial results after markets closed on Monday, booking a $98 million net profit, up from $81 million in the same quarter last year.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

Download the Yahoo Finance app, available for Apple and Android.