Per sources, Cenovus Energy Inc CVE, a major Canadian oil producer, has inked deals with the Canadian National Railway Co to transport crude to the U.S. markets.
Several such deals related to shipments along with accelerated deliveries of new locomotives will help in enhancing crude movement by 50% by the end of 2018. Per sources, the deal between Cenovus Energy and Canadian National Railway was signed before a Canadian court reversed its approval of the Trans Mountain oil pipeline expansion in the previous week.
Lately, Canadian producers have been facing tremendous loss in revenues due to pipeline capacity constraint. Therefore, they are being forced to sell products in the United States, their major market, at highly discounted prices.
These commitments by oil producers with shippers have provided Canadian National Railway and smaller rival Canadian Pacific Railway Ltd an advantage. They will be able to ship more than 300,000 barrels per day by December, per a consultant who was involved in talks among oil producers and railways for the Alberta government in 2018.
A few years ago, the railway income was deteriorating as demand for crude by rail waned and was substituted by demand for pipeline space. Nevertheless, the producers are again seeking crude transportation by rail and railways are willing to enter into multi-year contracts and take-or-pay deals. In June, crude movement by rail touched a record 200,000 barrels per day (bpd) and is expected to touch 300,000 bpd by 2018 end, up 50% from 150,000 bpd in December 2017. This figure is estimated to increase further in 2019 with rise in locomotive deliveries.
None of the parties involved disclosed any details. In July, Cenovus Energy’s CEO stated that he was contemplating a multi-year commitment to move 50,000-60,000 bpd by rail.
Higher crude shipments also raise safety concerns. Apart from Canadian oil’s massive discount relative to WTI, the pipeline shortage created another problem for the energy sector. Crude shippers became more dependent on railway and trucks, which is costlier than pipelines and are less safe. Carrying oil by railways and roads makes crude transportation more prone to spills, which is ironically the primary concern for environmentalists.
The Western Canada’s rail loading capacity of about 1 million bpd is still not adequate to carry all the Canadian crude to U.S. refineries. Thus, new locomotives are required to be commissioned to meet the growing demand.
Mainline pipeline of Enbridge Inc's ENB remains oversubscribed and needs to allot space on a prorate basis each month as oil producers raise production.
In the past year, Cenovus Energy’s shares have gained 6.2% compared with the industry’s 15.5% rise.
Zacks Rank & Other Stocks to Consider
Cenovus Energy currently carries a Zacks Rank #2 (Buy).
A few other top-ranked players in the same sector are Petroleo Brasileiro S.A. PBR, or Petrobras SA and Helix Energy Solutions Group, Inc HLX. Both these stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Petrobras is the largest integrated energy firm in Brazil and one of the major players in Latin America. It pulled off an average positive earnings surprise of 10.4% in the last four quarters.
Helix Energy offers specialty services to the offshore energy industry. The company delivered an average positive earnings surprise of 66.7% in the trailing four quarters.
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