Daily Gains Letter

Why Canadian Oil Plays Are More Attractive Than Their U.S. Counterparts Right Now

By for Daily Gains Letter |

Canadian Oil StocksWhile the U.S. economy is hardly on solid footing, the fact remains that as the world’s biggest and most influential economy, the U.S. doesn’t have to be running optimally to keep the global economy chugging along. Though, it would be nice if the U.S. economy would gain sustainable traction. Until then, we will have to be content with its glacial pace of recovery.

And it is slow. In 2012, gross domestic product (GDP) growth was 2.8% and in 2013, it slowed to just 1.9%. Things are expected to get better over the next two years. U.S. GDP growth is forecast to hit 2.8% in 2014 and an even three percent in 2015.

The rest of the world will be playing catch-up. Well, save for the Chinese economy, which has a 2014 growth forecast of 7.5%. GDP growth in the eurozone picked up 0.3% in the fourth quarter of 2013—the third quarter of growth since the end of an 18-month recession. (Source: “Eurozone GDP growth gathers speed,” BBC News web site, February 14, 2014.)

The International Monetary Fund (IMF) forecasts that India’s GDP growth will hit 4.6% this year and climb to 5.4% in 2015. Brazil recently revised its 2014 GDP growth rate from 3.8% to 2.5%—which is still higher than analysts’ GDP growth forecasts of 1.79%. (Sources: Mishra, A.R., “IMF says India needs more rate hikes to bring inflation down,” Livemint.com, The Wall Street Journal, February 20, 2014; “Brazil cuts 2014 budget, GDP estimate,” Buenos Aires Herald web site, February 21, 2014.)

For investors who have been waiting for a broadly based global recovery, these are encouraging signs. It also points to long-term growth for investors interested in resource stocks—in particular, those interested in crude oil plays in Canada, especially in the currently out-of-favor tar sands.

For starters, since October 2013, the Canadian dollar has slumped from USD$0.97 to USD$0.90—losing more than 0.7% of its value. This may not be good news if you live in Canada, but any resource stock that operates using Canadian dollars and sells in U.S. dollars will benefit right off the top from the falling currency.

Secondly, the cold winter that has blanketed much of North America and parts of Europe has set the stage for higher natural gas and oil prices. On top of that, U.S. crude inventories came in below expectations last week, rising just one million barrels, less than last year’s level and the five-year average. Even after we put the harsh winter behind us, it will still take months to build up our crude inventory numbers.

But why consider so-called “dirty” oil from Canada’s tar sands in Alberta when there are plenty of excellent plays in the U.S.? Well, aside from needing a diversified portfolio, studies show cost might be a big factor.

According to one study, Western Canadian plays (including the oil sands) cost less to produce, on average, than crude oil plays in the Bakken in North Dakota and the Eagle Ford and the Permian Basin in Texas. (Source: Cattaneo, C., “Oil sands costs beat those of U.S. tight oil, new studies show,” Financial Post, February 20, 2014.)

Crude oil from the tar sands in Alberta is produced at a breakeven cost of $63.50, and oil from existing integrated oil sands mining projects has a breakeven cost of $60.00 to $65.00. Shale oil from the Saskatchewan Bakken is home to one of North America’s best deals with a breakeven price of $44.30 a barrel.

This contrasts with crude oil from the U.S. Permian basin with a breakeven cost of $81.00 a barrel. U.S. Bakken oil came in at $69.00 per barrel, and the U.S. Eagle Ford came in at $63.57.

While crude oil and natural resource plays have their advantages and disadvantages, it might be advantageous to research some Canadian crude oil plays sooner rather than later. Crescent Point Energy Corp. (NYSE/CPG, TSX/CPG) and Canadian Natural Resources Limited (NYSE/CNQ, TSX/CNQ) are two Canadian crude oil plays that could enjoy solid gains on an improving global economy and a weak Canadian dollar.

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