Canadian benchmark oil prices have fared relatively well by comparison, in part due to the insulation afforded by a softening Canadian dollar. Indeed, Canadian benchmark oil prices are based not only upon US benchmarks, but also the foreign exchange rate. As such, a softer Canadian dollar is favourable for Canadian oil prices. This stabilizer is often overlooked, but important in our eyes because an investor is buying a cash flow stream. As a simple illustration – holding all other factors constant, a US$0.01 depreciation in the Canadian dollar would largely off-set a US$1/b fall in WTI as it relates to Canadian light and heavy oil prices. From June 30 to September 30, the Canadian dollar depreciated 5% (US $0.04) versus the US dollar. In contrast to Brent and WTI, Canadian light and heavy oil prices fell by a more moderate 8% from the open to close of the third-quarter (Exhibits 1-2). Our 2015 estimated CFPS sensitivities to the Canadian dollar are outlined in Exhibit 3.
Third-quarter benchmark oil prices were down sequentially, but should support reasonable earnings/ cash flows. Average Brent prices of US$102.14/b fell 7% sequentially in the third-quarter, while WTI prices of US$97.69/b were down 5% on average. Canadian light oil benchmark prices of $97.89/b were down 6% sequentially. Syncrude’s synthetic sweet prices averaged $103.36/b during the quarter – a $5.47/b premium to Canadian light. Canadian heavy oil prices were down 7% sequentially, averaging $84.41/b with a heavy oil spread that widened to 21% of WTI (vs. 19% in the second-quarter).
In our minds, quality energy producers have gone on sale and offer good value at current levels. Based on our net asset value analysis, our Canadian integrated oil and senior independents are discounting a long-term escalated WTI price of US$90/b, versus a trough of US$62/b and peak of US$102/b since the beginning of 2009 (Exhibit 4). Recent share price corrections have been even more pronounced as we move down the market cap spectrum.
From a Canadian oil-weighted producer standpoint, we continue to favor companies with well-defined growth plans, above average execution capability, and solid balance sheets. Our oil-weighted hit parade includes Suncor Energy, Canadian Natural Resources, Crescent Point Energy, MEG Energy, Vermilion Energy, Baytex Energy, Whitecap Resources and Tamarack Valley Energy – all rated Outperform.