While U.S. oil companies have been going strong thanks to the boom in the Permian Basin, the same cannot be said for Canada’s own energy sector. Oil companies in the Albertan oil sands have historically struggled when oil prices are low since extraction costs significantly more in the oil sands then it does in other oil areas.
Even with oils increase in price, many international investors aren’t as excited about the Canadian oil sector as they are about America’s. However, this is likely to change as the Canadian government approved the expansion of the major Trans Mountain pipeline.
Oil companies in Alberta have been waiting for years to see the approval of the expansion project, which has previously delayed before getting the green light again on Tuesday. This is a big deal for oil and gas companies as once the pipeline is completed, they will have the logistical capacity to sell their oil to the world markets as opposed to being forced to sell at a discount to the U.S.
“Today I am announcing that our government has newly approved the Trans Mountain pipeline expansion project going forward,” said Prime Minister Justine Trudeau on Tuesday. “We need to create wealth today so we can invest in the future. We need resources to invest in Canadians so they can take advantage of the opportunities generated by a rapidly changing economy, here at home and around the world,” he added.
The project is planned to triple the capacity of the existing Trans Mountain pipeline, a move which will help expand market access. However, there still are some potential hurdles on the horizon. With the pipeline unlikely to become fully functional until 2022, there’s plenty of time in the meanwhile for legal challenges to surface, something that has already happened before.
Previously, there were at least 18 legal challenges lobed at the first Trans Mountain pipeline expansion, with almost all of them failing. The one that succeeded in suspending the project in the first place was a federal appeal court challenge by First Nation groups. Time will tell whether more legal obstacles have popped up, especially since Canada’s Prime Minister was willing to sell the pipeline to indigenous groups after it’s completed.
While the Canadian oil and gas sector has lost favor among international investors, there have been some surprising moves made in the industry. Warren Buffett made news earlier this year when it was revealed that Berkshire Hathaway made a surprise investment in Suncor Energy (TSE: SU), one of Canada’s largest energy companies.
Besides the strong four percent dividend, which is attractive to value investors like Buffett, Suncor is one of the best-positioned stocks in the Canadian energy sector, with only modest debt in relation to its size as well as solid earnings growth. Most importantly, the stock is relatively cheap according to traditional financial metrics.
Other companies in the Canadian oil space have been hitting 52-week lows but could stage a comeback on the good news. Tourmaline Oil (TSX: TOU) and Enerplus (TSX: ERF)(NYSE: ERF) fit in this category. Whether or not today’s announcement signals a potential buy opportunity in the Canadian oil sector at large is yet to be seen, but major companies in the market are likely to benefit either way.
