Oil by rail up in second half of 2018, easing bottlenecks: Cenovus

April 25, 2018 | Canada

The chief executive of Cenovus Energy says Canadian rail companies have hired and are training crew and are reactivating a number of locomotives to handle increased oil by rail shipments in the second half of this year. CP Rail photo.

Alex Pourbaix, Chief Executive at Cenovus Energy, says he believes oil by rail shipments will increase in the second half of this year, reducing bottlenecks that have resulted in a significant discount for Canadian crude compared to US WTI.

In recent months, Canadian oil producers have been struggling to get their crude to market as pipelines are operating at capacity and railways have been focussing on transporting agricultural goods.

And in March, Cenovus reported it had to operate at lower capacity because of the difficulty it faced transporting heavy crude out of Alberta to US markets.

Analysts were concerned that the company would not be able to meet targets for 2018 that had been previously set, but Reuters reports Poubaix discounted the danger and shares in one of Cenovus, one of Canada’s largest oil sands producers, rose by 6 per cent.

“Despite the temporary pullback in production in the first quarter, we still expect our oil sands volumes for the year to be within our original guidance of 364,000 to 382,000 barrels per day,” Pourbaix told a conference call with analysts.

“I’m really confident that as we move into the second half this year and into the first half of 2019, we’re going to be seeing very material volumes of oil moving by rail,” he added.

Canadian rail companies have been reluctant to sign short-term contracts favoured by oil companies. But, Pourbaix says rail lines have recently hired more crew and are training them to handle crude shipments. As well, they have “indicated that they’re reactivating a fair amount of locomotives.”

The discounts buyers take for Canadian crude over US light crude averaged $24.28/barrel in the first quarter of this year, up 67 per cent over this time last year.

As a result, profits took a hit as netbacks, which is profit after subtracting transport and other expenses, averaged $16.80/barrel of oil equivalent in the first quarter, compared to $21.25/barrel in 2017.

Cenovus’s total oil sands production almost doubled in the first quarter of 2018 compared to Q1 2017, rising to 359,666 barrels per day (b/d) from 181,501 b/d.

“Investor attention increasingly appears to be migrating toward a much more constructive 2019 outlook,” Raymond James analyst Chris Cox told Reuters.