Declining differentials are boosting Canadian oil revenues

[dan_s]

Completion of the Trans Mountain Pipeline has caused oil price differentials to decline in Western Canada.

Notes below are from Surge Energy (SGY.TO), one of the companies in our Small-Cap Growth Portfolio.

"During Q1/24, Western Canadian oil producers were significantly impacted by wide crude oil differentials. The Western Canadian Select ("WCS") differential (a discount to US WTI per barrel) averaged US$19 per barrel in Q1/24. As of May 8, it has now tightened to approximately US$12 per barrel on the spot market. Additionally, the Mixed Sweet Blend ("MSW") light oil differential, which averaged a discount to WTI of US$9 per barrel in Q1/24, is now currently trading at a US$3 per barrel discount to WTI." < I expect these differentials to keep falling and they may go to zero this summer.

"Surge's forecasted 2024 annual cash flow from operating activities increases by approximately $9 million for every US$1 per barrel increase in the WTI price. Furthermore, every US$1 per barrel decrease in either the WCS or MSW differential increases the Company's forecasted 2024 annual cash flow from operating activities by approximately $4.5 million. A US$1 per barrel decrease in both differentials increases Surge's forecast 2024 annual cash flow by $9 million." < If WTI averages $80US/bbl, I expect Surge to reach their debt reduction target by mid-Q3 and increase their monthly dividends. Surge's realized natural gas and NGL prices were higher than my forecasts in Q1. The Company should generate over $300Cdn million of operating cash flow in 2024 ($3.00Cdn/share) and over $100 million of free cash flow this year.

Surge has a webinar today at 1PM CT. I will be on the call and I will update my forecast/valuation model for the Company soon after the webinar.