Alberta Government extends mandate into 2020.

Nicholas Lupick, CFA

On August 20, the Alberta government provided an update on the province’s mandated crude oil production curtailment, extending the program until December 2020 as well as making minor adjustments to the program. Overall, we view the update as being relatively neutral (in line with our expectations) to the prevailing landscape for producers of crude in the Western Canadian Sedimentary Basin as consensus has been forming that a roll-over of the agreement would be necessary into 2020 given the lack of permanent egress additions expected in 2019.

Mandate Extension
As it was understood that the original production curtailment program announced by the NDP government in December 2018 had a sunset clause slated for December 2019, it was known that affirmative action was going to be needed by the UCP government to extend the program into  2020. Originally, the program was expected to unwind with the commissioning of Enbridge’s (ENB-T; Not Rated) Line 3 replacement in 2019. However, with the pipeline continuing to be delayed by court challenges, it is looking increasingly unlikely that Line 3 will be operational by the end of 2020. As a result, a consensus was forming that the program was going to be required in 2020. Of note, the Government did highlight that an early termination of the program is possible if egress out of the basin improves earlier than December 2020.

Some Reprieve for the Smaller Producer
The most notable amendment to the curtailment program was an increase in the exemption level for smaller producers, from 10,000 bbl/d to 20,000 bbl/d. As a result, the smallest producers impacted by the curtailment will now largely be exempt from the program, lowering the number of producers impacted from 29 to 16 going forward. We believe this to be most beneficial to entities such as (ATH-T; $1.50 TP; OP), Tamarack Valley (TVE-T; $3.75 TP; OP), Pengrowth (PGF-T, $0.60 TP, UP), Baytex (BTE-T; Not Rated), Whitecap (WCP-T; Not Rated), and Obsidian (OBE-T; Not Rated) as well as a number of other private producers.

The Punch Line
For those investors who ascribe to our thesis that the Canadian differential is likely to widen in the near-to-medium term, as production from the basin increases to a consistent level beyond pipeline capacity (and challenges record levels this Fall), we highlight that Canadian Integrated producers as the best defensive investment, in particular Suncor (SU-T; $58.00 TP; OP) and Husky (HSE-T; $20.00 TP; SP) as weaker local crude prices will translate into higher downstream margins as well as those entities with significant crude-by-rail takeaway capacity such as MEG (MEG-T; $10.25 TP; OP) and Cenovus (CVE-T; $14.75 TP; SP).