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BofA bullish on Canadian energy stocks ahead of ‘challenging’ 2024

BofA says the TMX expansion and Coastal GasLink projects will benefit Canadian oil and gas stocks in an otherwise tough year for the sector.A pipe yard servicing government-owned oil pipeline operator (REUTERS/Jennifer Gauthier)
BofA says the TMX expansion and Coastal GasLink projects will benefit Canadian oil and gas stocks in an otherwise tough year for the sector. A pipe yard servicing government-owned oil pipeline operator. (REUTERS/Jennifer Gauthier) (Jennifer Gauthier / reuters)

Canadian oil and gas could be a bright spot for energy investors in 2024, according to Bank of America Securities analysts eyeing a challenging year ahead for the sector south of the border.

BofA’s recent 2023 Global Energy Conference in Houston, TX saw the highest-ever attendance from Canadian companies, analysts led by Doug Leggate noted in research published on Monday.

Following meetings with executives from Imperial Oil (IMO.TO)(IMO), Canadian Natural Resources (CNQ.TO)(CNQ), and Tourmaline Oil (TOU.TO), they see stronger prices for Canadian producers next year, thanks to improving pipeline capacity.

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The Trans Mountain Pipeline expansion project, stretching from Alberta to British Columbia, is expected to start operating in the first quarter of 2024. It’s set to ship an extra 590,000 barrels per day of crude to the West Coast.

Earlier this month, TC Energy (TRP.TO)(TRP) said its Coastal GasLink project is mechanically complete. The pipeline is set to deliver natural gas from northeastern B.C. to the LNG Canada facility in Kitimat, B.C.

Leggate says the macro outlook for oil in 2024 will remain a story of Saudi Arabia and OPEC+ intervention to support prices, versus demand concerns, and rising supply from the United States and Guyana.

Canadian crude trades at a discount to the U.S. benchmark, West Texas Intermediate (CL=F).

“With a backdrop that frankly sets up a challenging year ahead for the broader energy sector, we see 2024 demanding a nimbler sector positioning that keeps stock selection at the core of sector strategy,” Leggate wrote.

“Increasingly, we see Canadian oils displacing mid-cap E&Ps (explorers and producers) as the incremental investment opportunity to leverage commodity outlook where the backward-dated price structure points to a challenging year ahead for the U.S. oils.”

He says backwardation, when the spot price is higher than the futures price, “looks like a permanent new normal for oil markets, and a headwind to sector valuations.”

Despite those headwinds, Leggate has “buy” ratings on shares of Suncor (SU.TO)(SU), Imperial, and Canadian Natural Resources.

Several Canadian oilsands companies reported third-quarter financial results in recent weeks. Leggate says the sector's performance has been "arguably overwhelmed by continued deterioration in oil prices."

WTI futures fell more than five per cent on Wednesday as OPEC+ announced a four-day delay to its upcoming meeting, without disclosing a reason. The new date of Nov. 30 clashes with the start of the 2023 UN climate summit, commonly known as COP28, set to be held in Dubai.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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