As Canadian energy stocks are finally seeing a bit of a push, and demand for Canadian commodities looks set to rise, juniors are confident that economics will ensure that Canadian oil--the cheapest in the world--will find its way to more markets, with or without Washington's approval of Keystone XL. In the meantime, some sweet spots in the Western Canada Sedimentary Basin, like the Montney shale formation--are showing promise as gas turns into oil for the bigger players, while the juniors are hoping to piggyback on this new success.
In an exclusive interview with Colin Soares, the CEO of High North Resources we discuss:
• How Libya and Warren Buffet boosted Canadian energy stocks
• Why we can expect stronger demand for Canadian commodities
• Why simple economics favors Canada's cheap crude
• Why Canadian juniors are banking on $70 oil
• Why oil price volatility will haunt us
• Why we shouldn't expect a big change in Canadian crude price differentials just yet
• Why Washington's approval of Keystone XL isn't as critical as before
• What we can expect from all the hush-hush over the Western Canadian Sedimentary Basin
• How the key for juniors in the Montney shale is to piggyback off the shift from gas to oil exploration
Interview by James Stafford of Oilprice.com
James Stafford: For the first time in months, Canadian ETFs are seeing an increase in flows--especially for financial and energy stocks. What is pushing this?
Colin Soares: I think there were a few factors. International money started flowing back into Canadian energy as global oil prices jumped 15%, on the back of Libya production falling down. WTI followed suit and all of a sudden the Canadian oil price was over $100 a barrel. Cash flow and profitability soared in Q3 2013.
Canadian management teams have got so used to deep oil price discounts, we focus only on developing top assets--ones that payout in a year on $75 oil. That's certainly true for the juniors--and there are hundreds of them in Canada. We have become a lot more disciplined in the last year as investors switched from growth at all costs to sustainable growth; growing within cash flow.
Then I think you just combine all that with the fact that the valuations on Canadian oils were so cheap--from juniors like us right through to seniors like Suncor. Warren Buffett bought a big chunk of Suncor this year and I think that helped money flows into our sector as well.
James Stafford: Can we expect stronger demand for Canadian commodities?
Colin Soares: Absolutely. The Americans are not allowed to export their crude, and Canada is. We now have the cheapest oil in the world, and simple economics says it will find a way to a market. The light oil might go to the west coast via a new pipeline, or it might travel across Canada to the eastern Maritime provinces, but it will find a way--for both heavy and light oil.
The US will always want our heavy oil, as their refining complex is mostly heavy oil. And our heavy oil trades at a discount to both Mexican and Venezuelan heavy oil.
James Stafford: What does this mean for Canadian juniors?
Colin Soares: It means we can budget on at least $70 oil, which is what we're doing.
James Stafford: Canadian heavy crude is sold at a large discount to US and world crude, but analysts are now predicting the end of these big price "differentials" as they're called, for Canadian heavy oil. Do you see an end to this volatility, and what factors will contribute to closing this gap?
Colin Soares: No, volatility will absolutely stay. Just having one refinery go down creates a big differential for a few days. And of course, pricing is seasonal as refinery maintenance happens in spring and fall, and oil prices are lower then, and the differentials are bigger then. You just get used to that and budget an overall price. Strong projects, with good economics will make money regardless of fluctuations in the oil price.
At High North we have been using a $70/barrel oil price to calculate our numbers and we are confident that we still have one of the fastest payouts of any wells in North America.
James Stafford: How do you see this playing out by the end of the year and into the first quarter of 2014?
Colin Soares: Differentials will stay larger than normal--though what's normal anymore?--through Q1 2014 until more pipeline capacity gets into place around North America. There is 800,000 barrels a day of refining capacity coming online in just the next two weeks! That is more competition and will raise North American oil prices.
And pipelines are racing to keep up to production increases and doing a good job. TransCanada's Keystone South project will be starting in just a few weeks taking oil from Cushing down to Houston.
The full interview can be found on Oilprice.com