Canada's Crude Awakening: Tariff-ic Troubles - Eh?

On November 25, 2024, President-elect Donald Trump first floated the idea to potentially introduce a sweeping 25% tariff on all Canadian imported goods, positioning it to be one of his first executive orders when he is inaugurated to office on January 20, 2025. When the announcement was initially made in November, it was largely overlooked by Canadian energy commodity and equity markets, despite the potential stark implications of the impact, with Canadian E&Ps only slightly under performing American E&P peers immediately subsequent to the announcement, and crude/gas benchmark futures and Canadian crude differentials largely unchanged.

This week, the market started to react as tariff talks started to materialize again and be taken more seriously, with Alberta Premier Danielle Smith warning of possible tariff implementation next week with no exemptions for oil and gas, after meeting with President-elect Donald Trump in Florida over the weekend. In this report, we provide an overview of the current landscape, sensitivity analyses on potential impacts, learnings from Trump’s previous 2018 tariffs, and a discussion of some of the potential risks that the Canadian energy industry faces in light of this news.

Highlights:
Exploration & Production
A significant portion of Canadian production has the potential to be impacted either directly or indirectly by tariffs, with the key question for investors and producers being the distribution of potential tariffs between the producers and purchasers (refineries, industrial power producers, etc.) of hydrocarbons, particularly for PADD 2 heavy oil volumes where refineries have effectively no alternate feedstock for ~2 mmbbl/d of current heavy oil imports, but producers also have limited ability to redirect volumes.

Integrated producers (Cenovus Energy, Imperial Oil, Suncor Energy) and condensate-rich producers (ARC Resources, NuVista Energy, Kiwetinohk Energy) will likely outperform peers on a relative basis, with refining markets partially offsetting tariff costs, and condensate pricing less impacted (production entirely sold in Alberta as diluent). Given the significantly lower operational leverage profiles, we also anticipate royalty companies to outperform on a relative basis, with Freehold Royalties likely best positioned given its L48 royalty exposure.

Energy Infrastructure 
While Canadian energy exports rely heavily on infrastructure to reach US markets, we expect much of the impact from imposed tariffs to be insulated through current contract structures and limited near-term volume implications. There is the potential for shipping volumes to shift away from US bound pipelines in favour of tidewater opportunities, where we could see TMX fill quicker than originally expected, reducing Mainline and Keystone utilization. 

The potential for lower localized crude pricing could be supportive of storage/blending opportunities (Gibson Energy, Pembina Pipeline, Enbridge) and those that operate Canadian refineries (Gibson Energy, Parkland Corporation, Tidewater Midstream and Infrastructure).  

Energy Services
We see marginal and indirect impact for the sector, likely from upstream capex cuts (2%-9% cuts), impacting revenues, and from any additional depreciation of C$ versus US$, which while raising US$ generated revenues, would also see the offsetting impact of a rise in product costs for imports from the US (sand, chemicals), especially if Canada imposes blanket retaliatory tariffs also. 

Within our coverage, Trican Well Service, Western Energy Services and STEP Energy Services have the highest exposure to Canadian revenues, and amongst drillers Western Energy Services and AKITA Drilling have the highest proportional exposure to E&Ps with high tariff exposure, while Ensign Energy Services has the least exposure.

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