In early June, Suncor Energy (NYSE:SU) put out a press release announcing that it was "set up for strong production for the remainder of the year." Driving Suncor's view was the fact that it finished all the major maintenance projects across its facilities and its recently completed expansion projects were exceeding expectations.
However, recent a power outage at its majority-owned Syncrude facility has taken that plant off line, which will put a damper on its output over the next few months. While that's bad news for Suncor, it's good news for most other producers in the U.S. and Canada because it will provide a temporary solution to a major problem that has been weighing on regional crude prices. As a result, Suncor's rivals are cashing in at its expense.
A slow reboot
Last month, Syncrude Canada reported that a tripped power transformer had shut down the 360,000 barrel-a-day (BPD) complex. Initially, Suncor Energy and its partners thought that the facility would be up and running by the end of July. Suncor recently reported, though, that it could take much longer to get back up to full capacity.
While the company said it has fully restored its power and steam systems, it will take quite some time to stage a safe return to operations. Suncor plans to return one unit capable of producing about 150,000 BPD to service during the second half of July. Meanwhile, the second unit, which can produce about 100,000 BPD, wouldn't start up until the first half of next month. Because of that, the facility will only be at about 60% to 70% of capacity next month and might not be back up to full speed until early to mid-September. That time frame means Suncor won't produce as much oil as expected this year.
Gaining from the pain
While Syncrude's outage will have a negative impact on Suncor's production and profitability in the near term, it will benefit other oil producers in Canada. That's because Canadian oil, known as Western Canadian Select (WCS), has sold at a deep discount to the U.S. oil benchmark, WTI, -- as much as $30 a barrel at some points -- due to the lack of pipeline capacity to move it out of the country. However, with Syncrude's output offline -- representing about 10% of Canada's oil production -- there's more space on pipelines, which has helped alleviate this issue and narrowed the gap between the two oil prices.
Two of the big beneficiaries of the Syncrude shutdown are fellow Canadian oil producers Canadian Natural Resources (NYSE:CNQ) and Cenovus Energy (NYSE:CVE), which both struggled with pipeline and pricing issues earlier in the year. In Canadian Natural Resources' case, it noted that transportation bottlenecks would cause the company to produce less than expected this spring. In the meantime, Cenovus missed analysts' expectations in the first quarter by a wide margin due to the pricing issues. But the shutdown of Syncrude has helped ease those problems in the near term, which should improve their profitability. That's why shares of Canadian Natural Resources and Cenovus Energy have both have jumped 14% in the days since Syncrude's outage on the optimism that they'll benefit from Suncor's misfortune.
Oil producers in the U.S. are also benefiting from Syncrude's shutdown. That's because it has also helped prop up the price of WTI versus the global benchmark (Brent). At times, Brent has traded more than $10 above WTI because shale drillers in the U.S. were pumping crude faster than the country could handle the oil. However, with less oil flowing into the country since Syncrude's shutdown, that discount has nearly evaporated.
Consequently, producers in the U.S. are earning more money on their oil, which will provide a near-term boost to their earnings.
A problem for one is an opportunity for others
While the power outage at Syncrude is a blow to Suncor, it's been a boon for the rest of the North American energy sector because it quickly fixed an oversupply problem that had been weighing on regional crude prices. That's enabling producers across the continent to make a lot more money per barrel. Unfortunately, those problems will likely return as Syncrude starts back up in the next month and could continue to dog the industry until new pipelines and other infrastructure come on line later next year.