In March 2025, Mizuho’s Jonathan Cain, Managing Director, Canada Investment & Corporate Banking, led panel discussions on Canadian upstream and midstream energy companies with a group of senior analysts from S&P, Moody’s, Fitch and Morningstar DBRS during Mizuho’s 7th annual Rating Agency Energy Panel Conference at the Calgary Petroleum Club. Below we present key messages from these two discussions.
Oil Prices Expected to Decline while Natural Gas Rises
Oil prices are expected to decline over the next two years as a result of lower demand, major ratings agency analysts said during the Mizuho panel discussion in Calgary. Each of the rating agencies currently centers their commodity price assumptions for WTI in the range of $60 to $70 per barrel between this year and 2027. By comparison, WTI prices averaged $77 in 2023 and $75 in 2024. Western Canadian Select (WCS) is expected to remain at a $13-$14 discount to WTI, according to Fitch, with similar differentials anticipated by other agencies. Increased demand for natural gas to supply LNG projects, including the startup of operations at LNG Canada this year, and to power electricity for technology infrastructure to support AI is the reason behind analysts’ expectations of Henry Hub prices rising. Estimates from the agencies range from $2.75 to $4.25 per million BTU over the next few years, with the lower assumption from Fitch likely to be revised upward in the near term.
Natural gas exports from LNG Canada are expected to begin their commercial start, on time, in mid-2025 which should provide a boost for Canadian natural gas. Despite the resulting improved access to global markets for Western Canadian producers, the agencies expect Canadian gas to maintain ample supply, sustaining a relatively wide discount between Canadian benchmark AECO and U.S. benchmark Henry Hub on the U.S. Gulf Coast. Mark Sadeghian, Senior Director, Fitch Ratings, commented that they anticipate the differential will mean revert towards $0.70 over the next few years, while Whitney Leavens, Vice President - Senior Analyst, Moody’s Investors Service, noted they expect this to be closer to $1.00.
Producers Outlook (on Tariffs)
Balance sheets of Canadian energy producers are generally in very good shape with ratings outlooks largely stable. From an overall credit perspective “balance sheets are in the best shape I’ve ever seen,” both in Canada and the U.S., Tom Watters, Managing Director & Sector Lead, Oil & Gas/ Chemicals, North America, S&P Global Ratings remarked. Should the U.S. administration decide to move forward with tariffs, producers are well positioned to absorb a 10% tariff, for a while at least. Assuming WCS at $50-to-$60 per barrel with a 10% tariff tacked on, the (extra) $5-to-$6 split across multiple parties “is not really going to break the bank” and will “probably be a distribution thing as opposed to a ratings thing, per se,” Sadeghian from Fitch said, adding that a 25% tariff on steel would have a more resounding impact since it’s about 20% of the cost of a project.
However, the impact could be felt on a refinery-by-refinery basis among those that take delivery of Canadian crude oil with consumers in the U.S. upper-Midwest and Rockies areas seeing rising prices. The length of the tariff policy is really what analysts were focused on; should the tariff policy remain for an extended period of time, it could force a reduction in demand for Canadian crude oil and a structural shift in the market. Ratings agency analysts are also keeping an eye on government policies for any changes that would impact the energy sector including a re-review of the carbon tax that could affect companies’ credit quality.
A View from the Midstream
The ratings outlook for the group of large Canadian midstream companies covered by the analysts was mixed. Moody’s said the balance sheets of Enbridge and TransCanada were well-positioned though Enbridge has slightly higher leverage. Both companies were modestly impacted by the rapid deterioration of the Canadian dollar in the fourth quarter of 2024, Gavin MacFarlane, Vice President, Senior Credit Officer, Moody’s Investors Service said.
S&P stabilized Enbridge’s rating after the company completed its utilities acquisition on the expectation that its leverage drops as cashflows begin in earnest and affirmed the rating for TC Energy. Both companies have a little bit higher leverage, compared to many other midstream issuers, but they also have stronger business profiles, Michael Grande, Managing Director & Sector Lead, Midstream Energy and Refining, North America, S&P Global Ratings said.
As to whether the Canadian market will be able to support the construction of additional large pipelines, analysts were skeptical. For example, given the cost overruns and permitting issues of the Coastal GasLink pipeline (Phase 1) which will supply LNG Canada, big expensive projects are unlikely to move forward anytime soon. Any overture toward building a second phase of the pipeline is dependent on the success of Phase 1, Moody’s Leavens said.
Future M&A?
Looking ahead, large producers are expected to continue to consolidate in an effort to buy proven reserves and production and “avoid the time and expense for greenfield developments,” Andrew O’Conor, Vice President at DBRS Morningstar said. While smaller Canadian producers can transact among one another, there is not likely another outsized transaction like the ones seen in the Permian Basin in 2023, at least anytime soon. While no major deals are afoot, the market could see a tuck in here or there as large infrastructure funds and financial sponsors recycle capital.
Michael Gorelick, Managing Director, Head of Ratings Advisory, Mizuho | Greenhill, contributed to this article.