Cenovus Energy Inc. shares jumped more than 9 per cent Thursday, a day after the oil sands producer said it had signed deals to ship growing production by train to key markets on the U.S. Gulf Coast.
The three-year deals, with Canadian Pacific Railway Ltd. and Canadian National Railway Co., give Calgary-based Cenovus added protection against the low prices its heavy crude fetches. The steep price discounts against prices for U.S. oil have swelled to more than US$30 a barrel as major pipelines fill up.
The rail deals show Canadian energy producers believe that delays to multibillion-dollar pipeline expansions will linger for longer than expected. Many had been reluctant to sign long-term deals with major railways, which had balked at moving large volumes of Canadian oil on a short-term or spot basis.
“Our rail strategy provides a means of mitigating the price impact of pipeline congestion," Cenovus chief executive Alex Pourbaix said in a statement. “While we remain confident new pipeline capacity will be constructed, these rail agreements will help get our oil to higher-price markets.”
Cenovus late on Wednesday said the agreements would deliver roughly 100,000 barrels a day of heavy crude from northern Alberta to various destinations on the U.S. Gulf Coast, home to major refineries and export terminals.
The Toronto-listed shares closed up 9 per cent at $13.09 Thursday.
Shipments are to begin in the second quarter next year and increase through 2019, with deliveries originating at a Cenovus-owned terminal north of Edmonton and from a facility in Hardisty, Alta., that is owned by USD Partners.
Cenovus has been under pressure since its 2017 acquisition of oil-sands assets from ConocoPhillips Co. The deal vastly expanded its production, but stoked worries about the company’s exposure to weakening heavy crude prices.
The company did not disclose commercial terms, but said it is expecting all-in costs to transport the oil from Alberta to the Gulf Coast would be less than US$20 a barrel. It said the deals with CN and CP also include rail-car leasing, offloading logistics, marketing and other arrangements.
National Bank Financial analyst Travis Wood pegged the cost in the range of US$17 to US$19, a level he said is economic in light of the current outlook for future heavy-oil prices.
He estimates the Alberta industry will need to boost total crude-by-rail shipments to 300,000 b/d to balance the market, versus current deliveries around 200,000 b/d.
Oil sands producers are counting on planned expansions to Enbridge Inc.'s mainline pipeline to the U.S. Midwest as well as TransCanada Corp.'s Keystone XL project to Steele City, Neb., to relieve bottlenecks in the long term.
Both projects have gained renewed urgency after a federal court last month quashed approvals for the Trans Mountain pipeline expansion to British Columbia.
Ottawa owns the existing Trans Mountain line and has sent the expansion project back to the National Energy Board for further study. But it has yet to outline how it will re-engage First Nations along the Edmonton-to-Burnaby, B.C., route after the court said its earlier efforts were inadequate.