Why Canadian energy is a secret bargain, spurring a hostile takeover bid in the oil sands

Globe and Mail

23-05-2025

Panic over U.S. President Donald Trump's global trade war and unexpected production bumps from countries outside North America have sent oil prices plummeting, making investors fear a 2014-style crash all over again.
Adjusting for inflation, the current price of West Texas Intermediate crude, the North American benchmark, is hovering around US$45. The last time it fell to this level, a decade ago, it spelled disaster for Canadian producers – and for the Canadian economy.
But this is not 2014. After years of painful restructuring, the Canadian oil industry is much stronger today, and some producers are now so resilient that they've earned the right to brag.
'The discipline today is night-and-day different,' Jeremy McCrea, an energy analyst at BMO Nesbitt Burns, said in an interview. The new era is defined by cost constraint, an aversion to debt and a promise to return excess cash to shareholders instead of spending it on endless expansion.
There is also a growing global appetite for natural gas, which is seen as a logical fuel source for AI data centres, and an increasing likelihood that Canada will build more export plants sourced by low-cost gas from the Montney formation in northeast British Columbia. In short, Canada's energy sector is sitting pretty.
Yet with more than half of the S&P/TSX Capped Energy subindex trading below their September, 2014, prices, investors aren't ready to admit it yet. Producers, however, see opportunity, which explains why Strathcona Resources Ltd. SCR-T launched a hostile takeover bid for MEG Energy Corp. MEG-T, one of the few pure-play companies focused on the Canadian oil sands.
MEG runs a low-cost oil sands operation at Christina Lake, earned $507-million in profit last year and recently paid down a good chunk of its debt early, yet its shares have been trading roughly 45 per cent below their September, 2014, level.
It's an odd scenario because the industry looked quite different before the 2014 crash. Costs were bloated, everyone was taking on debt to expand and oil and gas companies were treated as growth stocks. Then Saudi Arabia shocked the market with plans to boost production and the growth bubble burst.
'No one wants to go back to that ever again,' said Mr. McCrea, the BMO analyst.
It wasn't just negligence from the producers. As investment in the oil sands exploded, the U.S. energy industry went through a revolution and new technology – fracking – unlocked oil and gas reserves that previously weren't accessible. The U.S. quickly went from being Canada's largest export market to its top competitor.
Around the same time, the ESG era that promoted environmental, societal and governance concerns took hold, putting a spotlight on oil sands emissions. Canada also struggled to get a pipeline or LNG plant built to export its energy beyond the U.S.
What snapped Canadian energy out of its seven-year rut was Russia's attack on Ukraine in February, 2022, which put an international focus on energy security. For the next few years, Canadian producers were akin to malfunctioning ATMs, spitting out cash as oil and gas prices soared.
Things have since settled down, but many companies are still quite profitable even as oil prices fall. Suncor SU-T, for instance, has pledged to cut production costs and in 2024 the company beat its US$4 target per barrel, lowering expenses by US$7 per barrel.
The sector's debt load also continues to improve. Cenovus Energy Inc. CVE-T has been hampered by leverage concerns for years, but in March Moody's Investors Service upgraded its debt rating to 'Baa1′ – the same level as industry darling Canadian Natural Resources Ltd. CNQ-T – citing the company's 'commitment to a conservative financial policy,' among other things.
Summarizing this new-look Canadian industry, Mark Oberstoetter, head of research for upstream companies at energy consultancy Wood Mackenzie, offered this comparison: Since 2014, 'everyone's been working out, but Canada has been training with a weighted vest.'
Adding to the bull case: Canada has long-life oil reserves, meanwhile U.S. shale oil wells are starting to run dry, and the Trans Mountain pipeline expansion is now up and running. Because more oil can be moved to the West Coast for export, the price differential between Canadian heavy crude, known as Western Canadian Select and West Texas Intermediate oil, is now around only US$12, because more Canadian oil can be exported abroad from the West Coast.
Previously, it would get trapped in Canada and the supply glut would hurt domestic prices. WTI oil could drop US$20 per barrel, and the Canadian differential could drop another US$20.
Despite all that, investors aren't convinced. Cenovus got a debt rating upgrade, and its shares are down 31.7 per cent over the past year.
Part of what's still missing, explained Benoit Gervais, head of the resource team at Mackenzie Investments, is policy certainty. Investors can't get too excited about Canadian energy if new export projects never get built.
'Mark Carney really needs to be careful with his first move,' he said. If the new Prime Minister isn't clear about his energy agenda, and the permanency of it, 'we won't attract a meaningful amount of capital. It's pretty simple.'
To that end, the new federal Minister of Energy and Natural Resources, Tim Hodgson, who used to sit on MEG's board of directors, delivered a speech in Calgary on Friday and had a clear message: Canada will remain a reliable global 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?''