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The argument in favour of Athabasca Oil Corp. has played out reasonably well over the past month. So why hasn’t the stock rallied?

The Canadian oil sands producer is widely viewed as one of the more leveraged plays on rising oil prices, attracting investors who can dream of a big upside here (full disclosure: I am one of these dreamers). Sure enough, the price of Canadian oil has rebounded from recent lows. But Athabasca’s share price remains in the dumps, raising questions.

The company drew some attention last year when Western Canadian Select oil (WCS), a benchmark for the heavy crude produced in Canada, traded at an absurdly cheap price. It touched a multiyear low of just US$13.46 a barrel on Nov. 15, 2018 – at a time when West Texas Intermediate (WTI), a U.S. benchmark, traded for US$56.46 a barrel.

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According to the bullish argument, the wide discount between WCS and WTI would eventually narrow as governments and producers tackled the reason behind it: a Canadian export glut caused by delays in constructing additional pipelines.

Alberta’s provincial government announced in December that it would address the oversupply of oil with a curtailment plan: Starting in January, oil production was cut by 325,000 barrels a day, easing the oversupply issue. As well, the government announced that it would boost exporting capacity through the purchase of additional rail cars, clearing the backlog.

The efforts appear to be working wonders. The price of WCS has more than tripled from its low, rebounding above US$44 a barrel. And the discount between WCS and WTI slipped to below US$10 last month, the lowest in a decade, from more than US$50 late last year, setting the conditions for a rally in Athabasca shares.

But what’s this? Though the share price has risen from a low of 84 cents on Dec. 24 to 97 cents on Tuesday, the stock is still deeply depressed. The price has mostly drifted beneath $1 since the start of 2019, and it remains more than 50 per cent below its recent high last May, giving investors little reason to feel pleased with their risky bet.

One issue weighing on the rebound is the fact that some observers believe that the higher price of WCS – and lower discount – is temporary.

“Canada is facing an epic pipeline problem. And while the current Alberta production cuts are providing near-term reprieve, the pressure in the system will continue to build once the curtailments roll off,” analysts at CIBC World Markets said in a note to clients last week.

The analysts expect that the WCS-WTI discount will more than double – to above US$20 a barrel – by the end of 2019.

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Alberta’s production curtailment isn’t permanent, after all. Big producers such as Imperial Oil Ltd., Suncor Energy Inc. and Husky Energy Inc. have expressed their dissatisfaction with the policy, arguing that it distorts incentives to expand and diversify.

"We think this action is unfair, anti-competitive and not representative of a free economy in a modern democracy,” Rich Kruger, Imperial Oil’s chief executive, said last week during a conference call with analysts.

The other factor working against Athabasca, more specifically, is that the company was pushed to shore up its balance sheet by selling its Leismer pipelines and Cheecham storage terminal to Enbridge Inc. (full disclosure: I own Enbridge shares, too). While the $265-million deal, which closed on Jan. 16, reduces Athabasca’s debt load, it also means that it must now pay another company to transport its oil, making it a bittersweet move.

The deal also coincides with layoffs and a tight capital expenditure budget at Athabasca, which is why Desjardins Securities analyst Justin Bouchard noted that the company “is in bunker mode for at least the start of 2019.”

Then what? A number of analysts, including Mr. Bouchard, believe that Athabasca still offers a lot of upside to improving oil prices.

“Investors with an appetite for high-risk, high-reward plays could stand to benefit once incremental pipeline capacity comes online in late 2019,” Mr. Bouchard said in a December note that pegged a target price of $2.25 on the stock.

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The rising price of Canadian oil in recent weeks, then, might be a head-fake. Persistent investors will have to hold on for a while longer.

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