Canada’s Crude Awakening: Tariff-ic Troubles… Arrive

On February 1, 2025, the US announced new tariffs on goods imported from Canada, Mexico (now on pause for one month), and China. The tariffs impacting Canada include a 25% tariff on a wide range of Canadian goods and a 10% tariff on Canadian energy exports including electricity, natural gas and oil. 

The US stated that these tariffs aim to compel Canada and Mexico to take stronger action against illegal immigration and fentanyl trafficking and to narrow the trade surplus with these countries. In response, Canada’s federal government will impose a 25% tariff on $30 billion worth of American goods coming into Canada. After a three-week public comment period, the tariff will be applied to an additional $125 billion worth of U.S. exports. 

While we believe that the US tariffs are not beneficial to either country and will have a negative economic impact on both sides of the border, the quantification of the planned tariffs does reduce some of the uncertainty that was an overhang on the sector and should allow Canadian energy investors to better gauge the cashflow and equity impact on the names. 

In this new report, we update our industry cashflow and free cashflow sensitivities for four cases highlighted in our previous report.

Highlights of our new report: 
Upstream CF Sensitivities to Tariffs Under Various Scenarios: In a worst case scenario, we see E&P CF impact of 7% assuming a 10% tariff and no FX change from the tariffs. In our most likely scenarios, we believe the FCF impact will be closer to 1-3%. While our scenario analysis also shows one case of CF improvement, we believe that scenario to be unlikely, as purchasers of Canadian natural gas and crude oil would most likely expect Canadian producers to absorb most of the tariff impact under such a scenario. 

Midstream Impact
We see limited impact given contracts in place and limited alternative options for redirecting crude oil outside of remaining underused TMX capacity. Hopefully, one positive impact of the tariffs would be a broader realization and urgency to reduce the barriers to expand/build key infrastructure outlets to diversify Canadian commodity sales towards a global market.

Services Impact
Under our most likely scenario, we would expect to see a 1-3% upstream capex spending impact. In our worst case scenario, we would expect a 3% spending impact. This results in a possible 1-3% impact for service activity revenue. One key point to note on the service side is that frac sand entering Canada will be subject to 25% retaliatory tariffs starting February 4, 2025. This could cause completion costs to increase, and whether the pumper or the E&P bears the cost will depend on the contract. 

Stock Performance
Over the past year, Canadian energy has outperformed US energy primarily due to the FX move. Since January 10, 2025, when the realization of Canadian energy being included in tariffs became a greater probability, adjusted for currency, Canadian energy is down 6.2%, while US E&Ps are down 3.7% and US energy as a whole is down 1%. It is possible that some of this relative underperformance unwinds given the more muted CF impacts likely. 

Differential and FX Moves
The outlook for Canadian light and heavy oil differentials have widened since January 10, 2025, and the CADUSD has further weakened, especially in the past week. With the tariffs going into effect immediately and the Canadian and Mexican crude for the February cycle already traded, the entire burden of the tariffs in February could be borne by US refiners or consumers.

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