The Upside/Downside of a Low Canadian Dollar: How a Languishing Loonie Affects the Canadian Oil and Gas and Pipeline Sectors

In this commentary, we analyzed the impact of the depreciating Canadian dollar on the Canadian Oil & Gas and Pipeline sectors.

Key highlights include the following:

-- Tariffs imposed by the U.S. and retaliatory actions taken by other countries have negatively impacted the outlook for the global economy.

-- A weaker Canadian dollar has an unintended benefit for Canadian Oil and Gas producers, who sell their exported production in more valuable U.S. dollars.

-- Annual cash flows for the Canadian Energy sector could benefit approximately $1.5 billion for every $0.01 depreciation in the CAD/USD exchange rate.

-- For major pipeline operators, a weaker currency has a minimal, temporary impact, with higher Canadian dollar capital costs restricted to the construction phase for U.S. projects.

"The positive impact of a depreciating domestic currency on credit metrics for Canadian producers could be mitigated by the use of material U.S. dollar-denominated debt," said Nima Billou, Assistant Vice President, Energy, Utilities, and Natural Resources at Morningstar DBRS. "If producers have not hedged the exchange rate risk related to U.S. dollar debt, they will have to convert more Canadian dollars to pay for U.S. dollar interest as the Canadian dollar weakens."