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Back in May, oil prices sank to levels not seen since the start of the pandemic five years ago.
There were two reasons for the fall. One was the economic uncertainty unleashed by the Trump administration’s rapid changes to tariff policies and their subsequent reversals or deferrals. The other was the recent decisions by major energy producer groups such as OPEC+ to increase oil and gas output.
West Texas Intermediate (WTI) crude oil traded below US$58 per barrel in May. That’s below the US$43.20 per barrel it saw in April 2020, on an inflation-adjusted basis. But it was recently back up over US$68.
OPEC+, which includes such major non-OPEC oil producers as Russia, Mexico, Kazakhstan, and Oman, agreed to cuts of 3.66 million barrels per day (bpd) in 2023 to help support oil prices. The organization recently agreed to begin reducing its output cuts, but so far this seems to have had little effect on oil prices.
President Trump’s exhortation to U.S. oil producers to “Drill baby drill” was part of his administration’s reversal of President Biden’s green energy push. Mr. Trump regards that as an expensive boondoggle leading to inflated prices and massive subsidies for renewable energy sources.
But oil prices below $60 per barrel are too low to allow petroleum companies to make a decent return on increasing production, which is already plateauing as the rapid decline in shale reserves makes it difficult to grow domestic output substantially from its present level.
Rather than investing in increasing production, conventional energy companies in the last few years have instead focused on becoming more efficient by lowering costs and returning excess cash to shareholders through share buybacks and increased dividends.
There have been some major takeovers in the oil patch, as managements have calculated it’s cheaper to buy reserves on Wall Street and Bay Street rather than drilling for them. Companies take the view that it’s a more effective use of their funds if investors are unwilling to value quoted oil and gas companies at a realistic level.
In Canada, the new Liberal government under Prime Minister Mark Carney has declared a new approach to developing conventional energy reserves. This is in contrast to the Trudeau government’s neglect of the sector, with the exception of the completion of the Trans Mountain Pipeline Extension (TME), which tripled capacity on the pipeline to the B.C. coast to 890,000 barrels per day.
Mr. Carney reportedly met with experienced oil executive Stuart Waterous, executive chairman of Strathcona Resources in March after Mr. Waterous and eight other oil executives published an open letter about the crisis in the energy sector and made proposals to solve it. Amongst the requests were the lifting of the federal cap on carbon emissions and expediting project approvals, especially for new pipelines to reduce Canada’s dependence upon exports to the U.S.
As pointed out by Andrew Willis in The Globe and Mail, Mr. Waterous evidently felt sufficiently encouraged by his conversation with Mr. Carney to launch a $5.9 billion hostile bid for oil sands producer MEG Energy, which he described as a sibling given its similar profile. MEG, which runs a low-cost oil sands operation at Christina Lake, earned $507 million in 2024, meaning Strathcona’s bid at a 9% premium to the pre-bid price values MEG at under 12 times earnings. MEG’s shares soared 18%, indicating investors believe a bidding war may break out.
MEG stock is selling at 45% below its level in 2014, before OPEC caused oil prices to halve from $100 a barrel and looks very cheap on any reasonable measure.
Because of the TME expansion, the discount of Canadian Western Canadian Select (WCS) oil to WTI has reduced to US$12 per barrel from US$20, making Canadian energy companies look more attractive. What is perhaps also driving the timing of the bid for MEG is the possibility of increasing the capacity of the TME by simple measures such as diluting the bitumen it carries. That move could increase its capacity by 25% to over 1.1 million bpd, further reducing the WCS discount to WTI.
Strathcona also recently bought the Hardisty Terminal, 200 kms southeast of Edmonton, for $45 million. Hardisty tranships bitumen into rail tank cars to ship to refineries, giving it alternative transport options.
Strathcona forecast that combining its operations with MEG would save up to $175 million annually in operating costs. Should other Canadian operators, such as Cenovus, bid for MEG, they could also expect substantial savings.
Cenovus merged with Husky Energy in 2021, three years after Husky has made an unsuccessful bid for MEG. Now that Cenovus has paid off some of the debt it took on when it merged with Husky, it might choose to return to the table. TD and Bank of Nova Scotia have bankrolled Strathcona’s bid, showing the major chartered banks are comfortable with increased exposure to the conventional energy sector.
The iShares S&P/TSX Capped Energy Index ETF (TSX: XEG) and Invesco S&P 500 Equal Weight Energy ETF (NYSE: RSPG) are off only about 1% over the last 12 months. This has reflected the weakness in the oil price. But those Canadian companies with the highest exposure to the oilsands such as Canadian Natural Resources (TSX: CNQ) and Cenovus Energy Inc. (TSX: CVE ) are off 9% and 23%, respectively, and even MEG is down 7% despite the bid. This is a reflection of the uncertainty over government policy towards the conventional energy complex and particularly towards building new pipelines to allow Canadian producers to export their products to destinations beyond the U.S.
Part of the problem is policy uncertainty. Benoit Gervais, head of resource investment at Mackenzie Investments, noted that “Mark Carney really needs to be careful with his first move.” If he isn’t, “we won’t attract a meaningful amount of capital. It’s as simple as that.”
The new Federal Energy Minister, Tim Hodgson, is an investment banker who used to sit on MEG’s board of directors. He delivered a speech in Calgary last week in which he maintained that Canada would remain a reliable supplier of oil and gas for decades to come.
“No more asking ‘Why build?’” he said. “The real question is ‘How do we get it done?’”
Of course, given the abysmal record of government over the last decade in getting projects approved, let alone built, the proof of the pudding will be in the eating. How soon will major energy infrastructure projects such as the proposed LNG export terminals in BC get built?
However, compared with the indifferent if not actively hostile attitude of the previous Liberal administration towards conventional energy, such comments from the new Liberal government should give investors grounds for optimism. This is especially relevant given the emphasis on reducing Canada’s dependence on the U.S. as a destination for its energy exports. About 90% of energy exports went to the States in 2023, before the TME started in June 2024,
Regardless of where WTI and Brent oil trades in the next 12 to 18 months, Canadian WCS prices should continue to benefit from a narrowing of the discount to WTI. Canadian oil and gas stocks should experience further M&A activity as managers like Mr. Waterous at Strathcona, CNQ, or Cenovus take advantage of the attractive valuations at which many Canadian energy companies are selling.
Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management. He is currently Chief Investment Officer of Calgary-based Spire Wealth Management.
Notes and Disclaimer
Content copyright © 2025 by Gavin Graham. This is an edited version of an article that first appeared in The Internet Wealth Builder newsletter. Used with permission.
The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/Supatman
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