I have written a little bit (in our YE17 Letter to Clients and in blogs) and have also spoken briefly about it in some Weekly Videos (highrockcapital.ca/weekly-video.html) about why Canadian Energy stocks are suffering a lot more than US Energy stocks.
The bottom line is that there are serious headwinds at work that range from NDP governments in both Alberta and BC, First Nations, Environmentalists and the National Energy Board (NEB). I have no idea which of these forces provide the strongest headwinds but they all seem to contribute to the fact that our great country is increasingly stranding our hydrocarbons (oil and natural gas) inside our country where it is unable to be exported to other countries which would pay a significant premium for those hydrocarbons. All due to the fact, if this continues, that we will not have any new pipelines and LNG (liquefied natural gas) plants built in the foreseeable future. This lack of infrastructure leads to serious transportation problems for those hydrocarbons - hence, they become stranded where they were extracted.
First and foremost, I am not suggesting there be rampant development of oil and gas that go unchecked. Surely there is a happy median where development and the environment exist in harmony?
Second, StatsCan doesn't really say what percentage of our Gross Domestic Product (GDP) is related to Energy but estimates have it around ~23%. That is a big number.
As an example of just how dramatically the natural resources business has changed in Canada over the past two years, have a read here: business.financialpost.com/commodities/energy/b-c-is-now-the-worst-destination-in-canada-for-oil-and-gas-investors-and-among-the-worst-in-the-world-survey. It was just two short years ago when we would only look at investments in BC and Alberta believing them to be some of the best jurisdictions in the world for the development of natural resources. Not so much today. Shocking that so much damage can be done in such a short period of time.
So you get the picture...lots of headwinds in the face of energy development in Canada. So what is the result? Not so good. Below is a chart of the difference between WTI (US oil) and WCS (Western Canadian Select oil):
Top half - the orange line is WTI and the white line is WCS
Bottom half - the yellow line is the differential between WTI less WCS
The big gap up in the 4Q17 shows that WTI has risen pretty substantially the last few months but WCS has lagged in a major way showing the gap now out to $25 from $10 last Sept/17. The effect of this means that our oil and gas exploration and production companies (E+P) and all of the oilfield services companies (OFS - companies that offer E+P cos services like drilling. drilling fluids, waste management, transportation etc) suffer. Here is why - if producers can't sell their products at a higher price, they are unlikely to spend more capital on exploration (drilling) and production. So both the E+P companies and the OFS companies get hurt.
As you can see from the chart, there have been periods where the spread was higher but those were periods when there were "temporary transportation" issues. This seems different and the stocks of all these Canada E+P and OFS companies reflect as much. I think this spread can get a lot wider in the coming year. Not good for Canadian Energy stocks and not good for our overall economy.
This ain't good and this is a big part of the reason why we are shying away from Canadian hydrocarbon equity risk right now and for the foreseeable future.