Export Growth And Cautious But Optimistic Commodity Outlook Our Conclusion
CIBC hosted 30 Canadian oil and gas producers and services companies for
fireside discussions at our 27th Annual Western Institutional Investor
Conference. We found companies took a general view of cautious optimism
for 2024, with a material improvement in balance sheets largely complete,
and an increased ability to return free cash towards shareholders. Interest of
investors in the space continued to skew towards larger companies, and the
most well-attended presentations included ARX, CVE, ERF, SU, and TOU.
Western Conference Key Takeaways
• Continued consolidation could occur in 2024. Investor focus
continued on the potential for M&A after a relatively busy 2023. While
many companies suggested 2024 was more likely to be a period of
integration, we believe mergers and acquisitions will continue this year.
We expect that consolidation in 2024 will focus on potential targets within
the Montney, Duvernay, Clearwater, and Mannville stack.
• Modest production growth within free cash flow is likely to
continue. Capital budgets contemplate modest production growth (1%
to 5%), while maintaining a focus on free cash flow returns to
shareholders. The growth profile is bolstered by the upcoming additional
egress capacity set to come online over the next 12-24 months in TMX
and LNG Canada. On a Q1/24 to Q1/25 basis, we estimate the large-cap
group will show production growth of 1%, oil-weighted SMID-caps 8%,
and gas-weighted SMID-caps 7%.
• Egress improvements could draw investor interest towards
Canada. We expect egress concerns to moderate into mid-2024 with the
completion of the Trans Mountain Expansion Pipeline (TMX). The
narrower heavy oil differentials have mostly been reflected in the forward
curve with WCS-WTI basis narrowing to US$12.75/Bbl in June. LNG
Canada commissioning we believe remains on track for year-end 2024
or early 2025. This opens up capacity for producers to gain stronger
pricing with access to global markets, but importantly also reduces
concerns international investors have held over investing in the
Canadian energy space for numerous years.
• Cautious optimism on commodity prices, but minimal indication of
capital spending changes at this stage. Despite the continued
presence of global conflict and a perceived lack of geopolitical risk
premium in both global oil and natural gas prices, there was cautious
optimism on pricing improvements from both investors and companies at
the conference. Current global inventories, the refilling of the Strategic
Petroleum Reserve (SPR), as well as the potential for type curve
degradation remained topical as reasons to be constructive on oil price. Whitecap: The company expects to balance development across its eastern and western
divisions. It sees production growth from the western division funded through the free cash
flow generated by the eastern division. The company expects to show production growth of
3% to 8% annually, driven primarily in the Montney and the Duvernay. Structurally, the
company will look to maintain a lower leverage profile to decrease risk, but also to provide the ability to be opportunistic. On the M&A front, large-scale acquisitions are not a priority given the company’s current inventory, but smaller tuck-in acquisitions similar to the consolidation Whitecap completed at the end of 2023 are more likely.