Energy Sector Update for 12/21/2015: SU.TO, CNQ.TO, CVE.TO, ARX.TO
While oil and gas business models are challenged globally in the current environment, the major Canadian oil sands producers (e.g., CNQ.TO, CVE.TO, IMO.TO, SU.TO) have remained relatively resilient -- the cash breakeven cost for oil sands, including sustaining capital, has trended towards the low US$40s per bbl on a WTI equivalent basis (vs. closer to US$$50/bbl at the start of 2015). Sustaining capex is now falling along with improved operating costs.
The brokerage expects oil sands production will continue to grow in the near term as committed projects are funded and enter the mix through 2017-2018. Longer term growth will likely depend on accelerated evaluation and implementation of new technologies that offer both incremental and step-change improvements in project economics and emission profiles.
Credit Suisse remains defensive in its sector positioning, and continues to favor SU, CNQ, CVE, ARX -- these companies have balance sheet room to fund strategic growth projects which should ultimately enhance long-term free cash flow generation. Capex for the mid and large cap producer universe is projected to be down 11% y/y in 2016.
The growth outlook for oil sands remains challenged given continuous pressure on oil prices , ongoing market access issues, and the climate policy proposed by the Alberta Government. In order to prolong growth post-2020 (i.e., beyond committed projects), oil sands producers will likely need to accelerate the evaluation and implementation of new technologies that offer both incremental and step-change improvements in project
economics and emission profiles.
Top picks: Suncor: Outperform, TP C$43
Canadian Natural Resources: Outperform, TP C$36
Strong reliability is helping the likes of SU and CNQ, writes Credit Suisse.
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