MEG Energy Corp T.MEG

TD Notes

[retiredcf]

THOUGHTS ON THE HEAVY DIFF & SHARE PRICE PERFORMANCE IN ADVANCE OF EXEC. ORDERS

THE TD COWEN INSIGHT

Highlights: 1) the WCS heavy diff. forward curve has materially weakened due to energy tariffs risk (Fig. 1). 2) The Cdn. energy index has underperformed the U.S. energy index by 9% (USD-adj.) since Jan. 10, 2025 (when energy tariff exemption was first called into question). 3) If energy is ultimately exempted, material heavy oil underperformers like ATH/ MEG/SCR, could stage a rally (Fig. 2).

Event: Distilling our thoughts on WCS heavy differential and Canadian coverage share price performance in advance of numerous executive orders, expected to be signed by the Trump Administration later today (inauguration at 12pm ET).

Impact: MIXED

• In Fig. 1, we map out the performance of the WCS heavy differential forward curve over the past two months, which clearly shows that forward pricing has weakened materially. This reflects the consensus view that the heavy differential should widen under an energy tariffs scenario. We believe most of the recent widening can be explained by energy tariff risk, with energy exemption no longer deemed a foregone conclusion following AB Premier Danielle Smith's return from Mar-a-Lago.

  •  As to why heavy diffs would widen under energy tariffs (absolute prices yes, but not so sure about the differential) is still somewhat unclear to us since the U.S. remains materially short heavy oil and long light oil (imports ~4mmbbl/d of Canadian heavy oil, while exporting domestically produced light oil off the USGC), with limited options to back-fill on heavy supply from other jurisdictions (Venezuela, Mexico).

  •  While WCS is not the most liquid contract, it is all the more noteworthy since spring marks a period of seasonal strength for the differential, due to lower oil sands blending requirements, the beginning of the summer paving season, and planned oil sands maintenance.

• In Fig. 2, we summarize the relative performance of our Canadian coverage since Jan. 10, 2025 on a USD-adjusted basis. This clearly shows that heavy oil producers like ATH, MEG, and SCR have been material under-performers while the midstreamers, and integrated producers, have generally outperformed.

It stands to reason that if energy is ultimately exempted (good reasons for this, in our view), then presumably companies like ATH, MEG, and SCR, could stage a relief rally. That said, we acknowledge that there may be other factors at play for MEG, in particular (disappointing Nov. Christina Lake production, 2025 guidance, etc).

We reiterate that the Canadian energy index (XEG) has underperformed the U.S. energy index (IYE) by ~9% on a USD-adjusted basis since Jan. 10, 2025.