LNG Terminal Poised to Boost Struggling Canadian Gas Producers

A liquefied natural gas terminal in British Columbia will “re-focus people on Canadian gas,” giving a boost to stocks like Tourmaline Oil Corp. and ARC Resources Ltd., according to the manager of more than C$500 million ($377 million) in assets for Bank of Nova Scotia.

A C$40 billion Canadian LNG project led by Royal Dutch Shell Plc appears to be ramping up, although a final decision hasn’t been announced. Scotiabank’s Jennifer Stevenson expects the project to go ahead, prompting investors to reevaluate struggling Canadian gas producers.

“That will make people look at Western Canadian gas economics in a new light because we have yet another place of egress,” said Stevenson, portfolio manager at 1832 Asset Management, a unit of Scotiabank. Stevenson manages C$319 million in energy funds and co-manages another C$268 million in resource funds. Stevenson’s Dynamic Energy Income Fund has returned 6.3 percent this year and 18 percent including dividends in the 12 months to June 30, according to Scotiabank. That compares with gains of 4.8 percent and 12 percent in the S&P/TSX Composite Energy Index over the same periods. Tourmaline lost 15 percent in the past year while ARC Resources lost 17 percent.

Money Printing

On another front, liquids-rich producers like Tourmaline and ARC have “amazing netbacks,” or gross profits per barrel, because they provide condensate to heavy-oil producers, which use it to dilute their crude so it can move through pipelines, she said. And Stevenson is bullish on big oil-sands players like Suncor Energy Inc. and Canadian Natural Resources Ltd., calling them “money-printing machines.”

Oil-sands producers benefit from relatively low costs and slow production declines compared with their shale peers, she said. Stevenson believes investors will start treating these companies more like industrials than commodity producers.

“This is a free-cash-flow generating business with annual dividend increases,” she said. “That dividend is sustainable way down the commodity price curve, and I think that allows a new type of investor to come in and say, ‘OK, this is more like an industrial business than a commodity play.’ That helps the share price over time.”

Besides the oil-sands majors, Stevenson said international players like Shell, ConocoPhillips and Chevron Corp. also fit this profile.

Stevenson is “structurally positive” on oil prices and sees West Texas Intermediate trading around $70 despite short-term volatility prompted by U.S. President Donald Trump’s threat to release crude from the nation’s Strategic Petroleum Reserve. WTI prices traded around $68 Wednesday after falling below $65 in June.

“There’s always going to be volatility on short-term noise, but the underlying fundamentals of supply versus demand are really strong,” she said.