Graeme Pearson
Hello and welcome to Strategic Alternatives the RBC Capital Markets podcast, where we uncover new ways to drive growth and create value with insights from our capital markets experts. My name is Graeme Pearson. I'm the Co-Head of Global Research at RBC Capital Markets. And joining me today is Greg Pardy, the Head of our Global Energy Research Team, as well as our Canadian Senior E&P and Integrated Oil Analyst.
Our global energy research team has recently published two reports in our Energy Insights series. They are “All in the Family” and “Canada – An Energy Powerhouse” which provide the basis for this discussion. So, Greg, a very warm welcome. Clearly lots of volatility in markets over the past couple of months. And more news from OPEC just over the weekend. So maybe let's start first with the macro backdrop for energy with the oil price certainly on the on the softer side of late.
Greg Pardy
Yeah, thanks Graeme. I mean it's nice to be here. Everything these days whether it's energy or other sectors is macro macro, macro, and so that is a fitting place to set the stage. So, when it comes to oil prices, I'd like to repeat what our Head of Global Commodity Strategy, Helima Croft, argues in “OPEC Wrap-Up: Rules-Based Order”.
In that OPEC group of producers, you know, who had been making voluntary cuts have now opted for a supersized three month output increase of around 411,000 barrels a day in June, or what, Brian Leisen, our Oil Commodity Strategist, wrote in “Oil Strategy Downside Accelerant”, which is, you know, that oil price risks are now skewed to the downside. And that has indeed led to a soft WTI pricing conditions of sub-$60.
Graeme Pearson
So, Greg, if the oil prices do indeed stay around these levels, how do you expect that producers to respond?
Greg Pardy
Yeah, I'm glad you used the word ‘respond’ rather than ‘react’ Graeme because it draws out some key themes. And by our yardstick, the average WTI price in 2025 required to cover estimated total capital expenditures and base dividends across our global coverage group sits at about $56, with a range of course.
Now, what that tells us is that producers will likely roll with the punches in a $50s WTI world, but the dividends are also much safer today than heading into the pandemic. And in reality, if oil prices move to $50 with any duration, producers would likely respond by cutting their capital spending, which would serve to lower WTI break evens even further.
Graeme Pearson
So, you said that dividends are relatively safe. How do the balance sheets look these days?
Greg Pardy
Yeah. In the same Energy Insights report “All in the Family,” the energy team ran a flat $50 WTI scenario in 2025 again across our global coverage. And this assumed no change in capital investment or costs. And what we found is that year end 2025, net debt to trailing cash flow ratios averaged about 1.3 times.
Now, to put that into context, 1 to 2 times is definitely in the comfort or the sweet spot. 2 to 3 times would warrant closer inspection and then over three times could suggest an over leveraged balance sheet. Now there is variation, of course, and the range of leverage ratios varied from 0 to 3.3 times. But what the stress test analysis tells us is that balance sheets are in good shape, especially vis-à-vis the pre-pandemic period.
Graeme Pearson
Yeah, the balance sheets have indeed deleveraged, as you say. How and why has that come about?
Greg Pardy
Yeah, it's a great question, I think because, you know, as a former analyst, that deleveraging can come in the form of, you know, a bigger denominator, i.e. cash flows or a smaller numerator, but specifically much of the balance sheet deleveraging in the energy sector was accomplished via net debt reduction.
And numbers wise, when you look at net debt across our global coverage at the end of 2024, it's a little over one half of the circa $400 billion that we saw at the end of 2020, in the depths of the pandemic. The motivation for this shift in behavior reflected two driving forces. The first was the near-death experience that many energy producers experienced back in 2020 because, as you know, both oil prices and refining margins crumbled.
Now, those dark days are still fresh in the minds of energy executives, we believe. The second factor revolves around the necessity of shareholder return. So, a corporate focus on free cash flow generation and shareholder returns via dividends and share buybacks took root emerging from the pandemic and remains a mainstay today. And so, as we think about investing in energy producers, it's not just about picking an oil price at a point in time.
This re-engineered model of financial resiliency gives rise to shareholder return optionality over time, especially when it comes to buybacks, which of course flex up and down.
Graeme Pearson
Yeah, Greg, that's some terrific global context on how the energy producers have reshaped themselves and are a lot more financially solid today. Let's pivot to Canada and what seemed like a bold title for your recent report, “Canada – An Energy Powerhouse,” talk us through why you chose that title and what it means.
Greg Pardy
Yeah, it is indeed a bold title, but a warranted one when you look at the numbers. So back in 2000, Canada produced about 2 million barrels of oil. That number has moved to 5 million barrels a day in 2025, and is actually set to climb by 800,000 barrels a day, reaching just under 6 million barrels a day in 2030.
So a tripling of oil production over three decades. And keep in mind that oil production in Canada is really anchored by the oil sands, which is longer cycle time in nature, call it 2 to 3 years from construction to production, with decades of reserve life in decline rates of under 20%. This all connects very, very well to the shareholder return model that we just discussed.
At the same time, the 590,000 Trans Mountain Pipeline Expansion really has transformed Canada's oil egress equation. This is a Canadian success story, and specifically, it's led to greater market diversification at a critical time, particularly earlier this year, as well as a revenue tailwind via a narrower and less volatile Western Canadian Select or WCS spreads.
Graeme Pearson
Can you just elaborate on that last part you mentioned there regarding the WCS spreads?
Greg Pardy
Yeah, certainly. I mean, look, for over a decade, Canada with short oil export pipeline capacity. And what that meant then was that Canada's heavy barrels in particular, were trading at wide discounts to benchmarks like WTI. Now, this all changed when TMX came online back in May of last year. And when you look at Canada today it is long export pipeline capacity.
When we look at WCS spreads versus WTI over the last 12 months or so, they've actually narrowed by about $4 U.S. Now that's actually around 23%. So, it's material. And we're now looking at half the volatility that we did in the versus the preceding 12 months. And what's more is when we roll up our supply demand analysis in the report, we expect Canada to remain long export pipeline until late 2027.
Now that reflects another 75,000 barrels day of incremental capacity that's moving into place across, you know, the Main Line, Express and Keystone lines that my colleagues Robert Kwan and Maurice Choy have discussed in “Energy Insights: Flow Canada – It's Now or Never”.
Graeme Pearson
Greg, thank you very much for your insights into the global energy sector. As you know, we're looking forward to continuing the discussion on these topics and more at our 2025 RBC Capital Markets Global Energy Power and Infrastructure Conference, which is being held on June the 3rd and 4th in New York. And thank you to all of you for listening to Strategic Alternatives, the RBC Capital Markets podcast.
This particular episode was recorded on the 6th of May 2025, and do please listen and subscribe to Strategic Alternatives on Apple Podcasts or Spotify, or indeed wherever you listen to your podcast. And if you enjoyed it, please leave us a review and share the podcast with others. Thank you.
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