The on-again/off-again US tariffs and the retaliatory actions by other countries toward the United States have negatively affected the outlook for both global economic growth and subsequently crude oil prices. US imports of energy products, including energy production from Canada and elsewhere, were declared to be exempt from tariffs by the US Administration.
However, increasing economic uncertainty has caused the current West Texas Intermediate (WTI) crude oil price to decline by about 22% versus the 2024 average.
A sustained weakening in the Canadian dollar should help oil and gas (O&G) producers in Canada to partially offset the impact of declining commodity prices. Oil and gas producers are able to offset the impact as most revenues are linked to US dollar-denominated pricing benchmarks (including WTI-basis oil and New York Mercantile Exchange (NYMEX) natural gas quotes), while costs are incurred in Canadian dollars.
This benefit would be partially offset for producers with material US dollar-denominated debt and minimal currency hedging, since they would have to convert more Canadian dollars to pay US dollar-denominated interest.
The Canadian dollar depreciated by 8% versus the US dollar during 2024, ending the year with a CAD/USD exchange rate of USD 0.69 versus USD 0.73 at the beginning of the year. The decline has continued in 2025, with the Canadian dollar averaging USD 0.70 in the year to date as of March 31.
Given the weakness in the Canadian dollar, we analyzed the potential impact on cash flow for the Canadian O&G and pipeline sectors. We also tabulated the potential cash flow sensitivities caused by a change in the CAD/USD exchange rate for a proxy group of the largest O&G producers in our credit rating universe.
Based on this analysis, we conclude that for every C$0.01 depreciation in the Canadian dollar, cash flows could increase by approximately C$1.5 billion for the Canadian Energy sector overall.
Regarding the Canadian pipeline sector, a weaker Canadian dollar would have a transitory impact in the form of higher Canadian dollar capital expenditures (capex) for US projects during the construction phase. We believe the long-term impact on our credit ratings is minimal once these projects are placed into service and start generating US dollar-denominated cash flows.
We analyzed the two largest Canadian pipeline operators, TC Energy TRP (rated BBB (high) with a Stable trend) and Enbridge ENB (rated A (low) with a Stable trend). We estimate that a weaker Canadian dollar could temporarily impact the cost of their secured capital programs by approximately C$0.9 billion because of the exposure to US projects with US dollar-denominated capital costs. Both TC Energy and Enbridge should be able to offset this impact through US dollar-denominated EBITDA that accounted for 55% and 51% of consolidated 2024 EBITDA, respectively.
Canadian Energy Sector Poised to Benefit from a Weaker Canadian Dollar
We analyzed a select group of the largest O&G producers in our rated universe to estimate the cash flow sensitivities of each to a C$0.01 decrease in the CAD/USD exchange rate. Collectively this group produced approximately 58% of Canada’s total crude oil production, 42% of total natural gas production, and 52% of total blended production on a barrel of oil equivalent basis for 2024.
The total annual increase in cash flow from a C$0.01 decrease in the CAD/USD exchange rate for our subset of Canadian energy producers is estimated to be C$843 million. Therefore, using this group as a proxy for the entire universe of Canadian O&G producers, and normalizing for the hydrocarbon product mix for total upstream production, we estimate total projected cash flows for the Canadian O&G industry would increase by about C$1.5 billion for every C$0.01 decrease in the CAD/USD exchange rate.
However, the positive impact of a depreciating domestic currency on credit metrics for Canadian producers could be mitigated by the use of material US dollar-denominated debt. If producers have not hedged the exchange rate risk related to US dollar debt, they will have to convert more Canadian dollars to pay for US dollar interest as the Canadian dollar weakens. Consequently, this increased interest burden in Canadian dollar terms would negatively offset or squeeze cash flows for the sector.
The two largest pipeline operators, Enbridge and TC Energy, each have significant exposure to the US dollar through secured capital programs, with US projects representing 60% and 69%, respectively, of each company’s total capital program. Morningstar DBRS has estimated that a weaker Canadian dollar has a minimal impact on the US dollar-denominated capital program for both TC Energy and Enbridge.
We estimate the inflationary impact to be C$0.9 billion for both pipeline operators, which is a manageable exposure in our view and would not have a significant impact on their credit metrics. For both companies, we calculated this impact as the difference between translating their projects at an average 2024 USD/CAD exchange rate of C$1.37 versus the year-end exchange rate of C$1.44. These inflationary impacts are temporary and occur during the construction phase, with a minimal long-term impact on credit metrics once the projects are placed into service and generate US dollar-denominated cash flows.
Both Enbridge and TC Energy offset the inflationary impact on capex budgets through internally generated US dollar EBITDA, which represented 51% and 55% of the 2024 consolidated EBITDA for Enbridge and TC Energy, respectively. For Enbridge, the percentage contribution of US dollar-denominated EBITDA should increase in 2025, given a full-year contribution from its acquired US gas distribution assets.
Potential Impact of Canadian Dollar Depreciation on the Energy Sector
For the Canadian upstream sector, the key driver for production plans and cash flows remains current benchmark crude oil and gas prices. Following the implementation of broad tariffs and reciprocal tariffs by the Trump administration on April 2, 2025, oil prices remain volatile. As of April 8, 2025, WTI closed at just over USD 60 per barrel which represents a decline of approximately 22% versus the 2024 average of USD 77 per barrel. Natural gas prices have proven more robust with a recent NYMEX price of USD 3.47 per thousand cubic feet (mcf) as of April 8, 2025, which represents a 58% increase versus the 2024 average (C$2.19/mcf).
Our CAD/USD exchange assumptions for 2025 and 2026 were changed in December 2024 from USD 0.75 to USD 0.70. The depreciation of the dollar can act as an automatic stabilizer to soften the adverse impact of commodity price volatility for Canadian O&G producers.
While pipeline operators with significant US capital programs in the US could feel a modest inflationary impact on budgets caused by a weaker Canadian dollar, contractual protections and US dollar-denominated cash flows should insulate their credit profiles from this impact in the medium term.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
