Western Canadian Select spared of any serious declines - in Canadian dollar terms
Without question, falling crude oil prices have led the stock market declines in the past few weeks. Many traders have questioned which companies (and which countries) can withstand the lower oil prices.
Producers outside North America are heavily leveraged to North Sea Brent prices. Brent is down 12% from the same time last month, 21% from 6 months ago and 18% from the same time last year.
West Texas Intermediate (WTI) declined a similar amount. WTI is down 13% from last month, 21% from 6 months ago and 21% from the same time last year.
The declines observed in Western Canada Select (WCS) were not as severe due to a narrowing of the Heavy Oil Discount (i.e., the difference between WTI and WCS). In US dollar terms, WCS is down 11% this month, 12% from 6 months ago and only 6% from the same time last year.
However, Canadian oil producers generally report revenues and costs in Canadian funds. A look at WCS in Canadian dollar terms paints a different picture (shown on the far right of the above chart). In fact, when viewed in Canadian dollars, WCS is down only 10% from 6 months ago and actually up 3% from the same time last year. The difference is obviously attributed to a weakening Canadian dollar, which should help Canadian heavy oil producers cushion any loses on the crude oil markets.
So what does this mean for Canadian energy companies? Many in the media have questioned the economic viability of the oil sands at these lower prices, and what falling oil prices mean for government royalties. In fact, heavy oil prices are actually 3% higher than mid-October 2013. Heavy oil producers such as Cenovus, Talisman Energy and Canadian Natural Resources should therefore not see a significant reduction in revenues from the same period last year.
However, as most traders know, energy stocks tend to rise and fall in sympathy with each other. If Brent and WTI crude oil continues to decline, expect Canadian energy stocks tend to decline in tandem, regardless of the currency trade.