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Remember the good old days Canada’s upstream players reel from 4th-quarter downturn, with capital spending forecast by Barclays Capital to drop 23% in 2009 Gary Park For Petroleum News
Painful as it is to be reminded, financial results for the third quarter of Canada’s upstream oil and gas sector have just been tallied.
Even without knowing the numbers for the final quarter, the meltdown of commodity prices and the ballooning financial crisis will yield a turnaround of breathtaking proportions once the October-December reports start rolling out in late January.
And, by then, the true measure of the impact on exploration and production companies and the related service and supply companies of cutbacks in capital spending and the industry’s inability to obtain external financing will be obvious.
Some industry leaders are invoking memories of the mid-1980s when industry protests against a federal energy program sent activity into a tailspin.
For now, no one is holding out even the remotest hope of a recovery — certainly not in the opening quarter of 2009 and perhaps not for the entire year.
Contrast is stark The contrast with just a few months ago is stark and the E&P and supply and service sector posted record and near-record numbers, which historians may eventually look back at with disbelief.
Third-quarter cash flows for 123 publicly traded E&Ps hit a record C$68.21 billion compared with a similarly mind-boggling C$63.61 billion in the previous three months, feasting on commodity prices that averaged C$103.23 per barrel for oil and natural gas liquids (compared with C$67.06 a year earlier) and C$8.42 per thousand cubic feet for natural gas (vs. C$5.72 a year earlier).
Upstream capital spending hit C$14.19 billion, an increase of C$852 million from the second quarter.
But E&P companies were already reacting to signs that the run-up in oil and gas prices was coming to an end. Their cap-ex on field work for the latest quarter was C$6.4 billion short of cash flow.
Public companies in the service sector enjoyed the fallout from the third-quarter bonanza, reporting combined revenues of C$5.6 billion, C$1.45 billion more than the same period of 2007.
Losing hand for ‘09 The two associations speaking for Canada’s supply and support companies have already dealt a losing hand for 2009 and are warning that there could be worse to come.
The Petroleum Services Association of Canada and the Canadian Association of Oilwell Drilling Contractors are both braced for further reductions in their well forecasts for 2009, despite the threads of hope dangling from record land sales in British Columbia and Saskatchewan in 2008.
A Barclays Capital report on global petroleum spending in 2009 predicted a 26 percent drop in the United States to US$79 billion based on responses from 245 companies, while the 85 companies surveyed in Canada point to a 23 percent drop to US$22 billion.
Barclays’ analysts noted that for the past two years, Canadian capital spending has trailed that in the U.S. and internationally, and spending reductions expected in 2009 are “broad-based across all company budget sizes.”
Of the larger companies operating in Canada, Barclays said the major cuts are by: Devon Energy, down 71 percent; EOG Resources, 50 percent; Nexen, Talisman Energy and Husky Energy, all 47 percent; and Canadian Natural Resources, 23 percent. At the bottom end of the chopping list are, EnCana, down 16 percent; Imperial Oil and Apache, each 13 percent; and Royal Dutch Shell, 7 percent.
The report said budget forecasts were based on average commodity prices of US$58 per barrel for West Texas Intermediate and US$6.35 per thousand cubic feet for Henry Hub gas.
Barclays’ analysts, like the Canadian industry organizations, said that given the outlook for the global economy and the commodity price environment further spending cuts are likely.
“It is important to note that given the fluid economic conditions and volatility in oil and gas pricing, operators are continuing to revise budgets and the spending cuts could be understated,” the investment bank said.
None forecasting increase As the axe is being taken to producers’ capital programs, none of Canada’s largest service and supply companies has publicly forecast a spending increase in 2009, with most indicating they will concentrate on maintaining and upgrading equipment.
Calgary-based investment dealer Peters & Co., based on cap-ex programs by the large-cap companies, has forecast that drill, case and well completion spending in 2009 will run to about C$15 billion, generating a well count of 14,500 (matching a forecast by the Canadian Association of Petroleum Producers) and a rig utilization rate of 34 percent, off sharply from its previous forecast of C$16.5 billion, 16,500 wells and a 39 percent utilization rate.
Bob Geddes, president and chief operating officer of Ensign Drilling, is braced for what could be the industry’s toughest year, noting that Western Canada has too many rigs, with a fleet that is capable of drilling 23,000 wells and supporting 35,000 wellbores.
He said there are too many rigs trying to drill the same hole, which he expects will lead to further price pressure in the summer doldrums.
AKITA Drilling, although keeping its 2009 budget under wraps, is troubled by the absence of any indication work could recover in the second quarter of 2009.
New royalty regime Jan. 1 Compounding the woes is the introduction of Alberta’s new royalty regime on Jan. 1, with harsh consequences for junior E&P companies, whose market capitalization on the TSX Venture Exchange had tumbled to C$16.5 billion at the end of November from C$56.2 billion a year earlier, further eroding their role in exploration drilling.
Robert Jennings, chairman and chief executive officer of Jennings Capital, said a slowdown in activity by junior companies is likely to continue as some bail out on obligations or simply finish work that is under way.
It needs only a sampling of releases since mid-December from junior and mid-size companies to develop a picture of what is in store in 2009.
• Compton Petroleum has set a capital program of C$161.5 million, down from C$410 million in 2008, with most of its spending concentrated on natural gas resource plays in central and southern Alberta. Underscoring the squeeze on financing, the program will be financed from cash flow, combined with the company’s existing capital structure, based on a budgeted average gas price of C$6.82 per gigajoule. The bulk of the spending is earmarked for the second half of 2009. Production is forecast to average 26,000-27,000 barrels of oil equivalent per day by December 2009.
• Breaker Energy plans to invest C$80 million in 2009 compared with 2008’s C$174 million as it pursues an established track record of three major horizontal resource plays in Alberta, including Provost, where it has 80 potential drilling locations. Average output for the new year is estimated at 7,700 barrels of oil equivalent per day. Funds from operations in 2009 are estimated at C$75 million. Net debt exiting 2008 is forecast at C$1.03 million, with an unused bank line of C$27 million.
• Freehold Energy Trust is slashing its monthly cash distributions to 12 cents per unit from 25 cents effective with its February payment, based on its expectation of an average West Texas Intermediate price of US$50 per barrel in 2009, exactly half its forecast for 2008. The trust is particularly vulnerable to swings in light-heavy oil price differentials as about one-third of its total production on a boe basis is heavy oil.
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