Athabasca Oil Corp T.ATH

RBC (TMX)

[retiredcf]

April 21, 2024

Energy Insights

A TMX Tailwind into 2027

The 590,000 bbl/d Trans Mountain Pipeline Expansion (TMX)—slated to come online in May—is a game changer set to substantially boost Canada’s oil export capacity and afford oil sands producers global market optionality. Our updated oil supply-demand analysis now suggests that western Canada should experience excess export pipeline capacity into 2027. TMX should yield structurally tighter Western Canada Select (WCS) geographical spreads that we envision dipping into the single digits in the second- half of 2024 once TMX is running at full rates. WCS-WTI spreads compare a heavy sour barrel with a light sweet one, thus light-heavy spreads (impacted by OPEC+ policy decisions) remain key.

Key Points:

• TMX—Made in Canada. The 590,000 bbl/d expansion of the Trans Mountain Pipeline (with the mainline running from Edmonton to Burnaby, British Columbia) brings its nominal capacity up to 890,000 bbl/d and affords producers global export optionality, including Asia. About 96% of Canada’s net oil exports were directed to the United States in 2023.

• Moderate Growth. Based on our refreshed/extended supply outlook, we peg Canada’s oil sands production growth from 2023-30 at about 510,000 bbl/d (2% CAGR, 73,000 bbl/d per year) reaching 3.8 million bbl/d. This reflects select brownfield expansions and improved operating performance, but also an ongoing corporate focus on capital discipline, decarbonization and rising shareholder returns (Exhibit 5). Canada’s total oil supply growth of 970,000 bbl/d from 2023-30 to 5.9 million bbl/d (3% CAGR, 139,000 bbl/d per year) is supported by conventional heavy oil/condensate growth and the start-up of West White Rose (Exhibits 3-4).

• Canada—Long Pipe into 2027. We estimate that western Canada could have excess oil export pipeline capacity of up to 300,000-400,000 bbl/d (excluding the impact of potential inventory drawdowns) in the second-half of 2024 as TMX ramps-up to design rates, gradually establishing balance in 2027 (vs. 2026 previously) (Exhibit 6).

• TMX—May Not Run Full. The Trans Mountain Interim Tolls of C$11.46/bbl (about $8.25/bbl) for less than 75,000 bbl/d under a 15-year contract, with a toll of C$10.49/bbl (about $7.55/bbl) for large heavy oil shippers (i.e., at or more than 75,000 bbl/d) under 20-year contracts to the Westridge dock, could see further modest toll escalation amid construction cost pressures. Given these elevated tolls (vis-a-vis established pipeline systems to the Gulf Coast), we do not anticipate that Trans Mountain’s 20% (178,000 bbl/d) of capacity reserved for spot shipments will consistently run full.

• WCS Spreads Set to Tighten. Trans Mountain’s tolls are secondary to the western Canada supply deficit we envision when it comes to driving structurally narrower WCS (and other crude streams) geographical spreads over the medium term. Prevailing WCS-WTI spreads of around $12 have narrowed in concert with TMX’s call for line-fill of 2.1 million barrels in each of April and May, but could dip into the single digits in the second-half of 2024.

• TMX Knock-On Impacts. TMX should boost oil sands exports via tankers into Asia and especially PADD V (California) as contracted shippers move their barrels off the Mainline (a common carrier system), potentially displacing some of California’s waterborne imports which may be rerouted into PADD III (Gulf Coast). PADDs II (Mid-Continent) and IV (Rockies) may be forced to bid up WCS to ensure adequate refinery feedstocks.

• Stock Selection. MEG Energy and Athabasca Oil are the most cash flow sensitive to changes in WCS-WTI spreads, while Suncor Energy is least impacted amongst our coverage group (Exhibit 1). Gibson Energy will benefit from the start-up of TMX, both due to a possible increase in oil storage requirements in the Edmonton area as well as oil production in the coming years, likely requiring a further build-out of storage in both Edmonton and Hardisty.