New pipeline may flow more profit to Canadian energy firms

The recently completed expansion of the Trans Mountain Pipeline has enhanced Canada's ability to transport crude oil, creating an investment opportunity among Canadian oil producers and energy service providers, says Fidelity's Ryan Oldham.

• In early May, the expanded Trans Mountain Pipeline began operations, opening wider access to global markets for the country's oil producers, and potentially leading to higher-priced sales and increased profitability, according to Fidelity Portfolio Manager Ryan Oldham.
• "The project is poised to boost revenue for Canadian oil exports, which I believe could help improve financial results for domestic oil producers and higher-quality energy service providers," says Oldham, who helms Fidelity Advisor^® Canada Fund.
• In managing the country-focused equity strategy since 2018, Oldham emphasizes shares of high-quality companies that are reasonably priced and that he believes can compound growth in the long term. Valuation also is important to Oldham, as he tends to buy shares of companies that are out of favor but exhibit attractive qualities, with a valuation lower than his calculation of fair value.
• The government-led pipeline expansion cost $34 billion, took 12 years to develop and is expected to triple the flow of crude oil from landlocked Edmonton, Alberta, to Canada's Pacific coast in British Columbia. Oldham explains that, for many years, Canadian oil producers have been forced to sell their oil at a discount to global pricing, given the pipeline bottleneck in exporting their product.
• Post-expansion, the pipeline features an additional 980 kilometers that run parallel to the original, which opened in the 1950s, notes Oldham, who adds that this will roughly triple the capacity of the country's only pipeline system from 300,000 barrels per day to an anticipated 890,000.
• In alleviating the bottleneck in Canada's oil-transportation network, the expanded pipeline could help upstream operators by reducing transportation costs and allowing access to a broader range of buyers, which, in turn, could allow them to sell their products at a higher rate, rather than at a discount, Oldham says.
• "Even as the world increasingly looks to renewable energy sources, I believe oil will remain relevant and vital to global economies, taking many years to flatten demand for this essential resource," he contends.
• Oldham considers Canadian Natural Resources, Suncor Energy, PrairieSky Royalty and MEG Energy—each a fund holding as of September 30—to be well-positioned to benefit from the pipeline's expansion in the long term.
• According to Oldham, each has a solid asset base and the ability to generate strong cash flow from operations, which could propel revenue growth in the next several years.
• "With triple the capacity, the expanded Trans Mountain Pipeline will allow these companies to improve pricing power, as it is notably cheaper to transport crude via the pipeline than by rail," Oldham concludes. "The pipeline has the potential to open these companies, and their oil, to new markets, providing a solid catalyst for potentially higher growth."