With oil prices ending their biggest dive since 2008 and natural gas prices now getting hammered, the Canadian petroleum industry is facing a double whammy of unmatched proportions as it faces the possibility of layoffs in the thousands as big LNG and oil sands projects get shelved and the threat of bankruptcies.
The only glimmer of hope lies in the merger and acquisition market until either United States producers or OPEC member countries give up ground in their battle for market share amid a supply glut.
Otherwise, the industry will rely on bone-chilling winter temperatures to drive up demand for heating fuel, causing a price blip.
2014 robust for M&A
The M&A sector enjoyed a robust year in 2014 and could see more of the same this year as cash-strong companies grab distressed assets, analysts say.
Data provider Infomart estimated US$63 billion was deployed in M&A activity in 2014, quadruple the value of deals in 2013, ending with the C$13 billion offer for Talisman Energy by Spain’s Repsol.
Terry Marshall, a senior vice president at Moody’s Canada, told the Financial Post that there is “absolutely greater opportunity for acquisitions. The nature of the industry is the big and the strong take out the weak and the small at times like these.”
Consulting firm Wood Mackenzie said the prospect of large-scale corporate consolidation may be greater than at any time in 15 years, driven by buyers who believe in the long-term outlook for oil climbing back above US$80 a barrel.
There is one school of thought among analysts, bolstered by the Talisman deal, that unless companies are strongly placed in the hedge market they can only survive so far on slashing dividends or capital budgets.
But Canada has retained a number of power-players in the M&A field as shown last year when Encana paid US$7.9 billion to acquire U.S. shale operator Athlon Energy, Canadian Natural Resources bought the Canadian oil and gas assets of Devon Energy for C$3.12 billion and Baytex Energy unloaded US$2.67 billion for Australia’s Aurora Oil & Gas.
Sale signs expected
The betting now among some observers is that the first two months of 2015 will see for sale signs springing up around companies that are grappling with asset impairments, potential write downs and are incapable of renegotiating lines of credit.
Crescent Point Energy, one of the leading E&P companies in the Canadian sector of the Williston Basin, is setting itself up as hunter rather than prey.
Chief Executive Officer Scott Saxberg is ready to take advantage of opportunities.
“Guys that have to sell in a down market usually sell their best assets,” he told Bloomberg.
The struggle to survive will be toughest for some of the smaller oil sands companies, many of whom are sitting on vast resources that are not needed or that they can’t raise the financial backing to develop.
Cash interest payment delayed
Southern Pacific Resource Corp. acted like the first canary in the coal mine on Dec. 30 when it “elected not to make the cash interest payment” of C$5.175 million due Dec. 31 on its outstanding 6 percent convertible unsecured subordinated debentures.
The company said in a statement that it had 30 days from the payment date to find the cash “before an event of default will occur.”
Otherwise the firm said it will continue working with stakeholders and advisors to “consider the next steps for the company in its strategic review and capital restructuring process.”
Connacher Oil and Gas, which has traveled a long, bumpy road, hired the Bank of Montreal in December to “devise and implement a strategy to address” its capital structure and Laricina Energy picked the Bank of Montreal, Peters & Co. and Morgan Stanley in November to explore strategic options that could end in an auction.
Support companies feel impact
These early signs of floundering in the oil sands have already started spilling over to support companies, with Houston-based Civeo “temporarily” closing down two lodges near Fort McMurray that provide accommodation for laborers and releasing 30 percent of its employees, noting that its occupancy rate was down 50 percent from a year ago.
“As it became evident during the fourth quarter that capital spending budgets among major oil companies were going to be cut, we began taking steps to reduce marketed room capacity, control costs and curtail discretionary capital expenditures,” said Bradley Dodson, Civeo’s chief executive officer.
Those steps mirror the budget cuts by several leading oil sands producers, with Cenovus Energy applying the brakes to spending on three expansion projects; Baytex Energy and MEG Energy chopping previously announced 2015 budgets; Norway’s Statoil shelving its undeveloped Corner project; and Canadian Natural Resources serving notice that it could quickly remove C$2 billion from its capital program.
If commodity prices remain low for another couple of months that will likely trigger much deeper cost-cutting, said Martin Pelletier, portfolio manager at Trivest Wealth Counsel, while Laura Lau, fund manager at Brompton Group, warned some companies will be forced to write down the value of some reserves that are no longer economically viable to develop.
“I think there’s another round of cuts to come,” Lau said. “A lot of companies have initially done a budget with an oil price starting with a 5.”
Gas also down
The historical trend of gas prices being up when oil is down, or vice versa, no longer seems to apply, with Canadian gas for next-day delivery at the AECO trading hub in Alberta ending the year at C$2.80 a gigajoule (slightly larger than a million British thermal units), compared with C$4.13 a year earlier.
Storage levels are well below those at the end of 2013, which were drawn down to multi-year lows by the end of March, when a number of analysts were off base with their predictions that inventories would be rebuilt in time for the heating season in November.
Unless there is a sustained deepfreeze in the first quarter of 2015, there’s not much chance of prices rebounding because there is even greater supply growth entering the new year than there was a year ago, said Martin King, a FirstEnergy Capital analyst.
FirstEnergy’s numbers show Western Canada supplies are at 14.5 billion cubic feet per day, compared with 13.4 bcf per day at the end of 2013, while gas in storage has shrunk over the same period to 70 bcf from 127 bcf.
With all of British Columbia’s leading edge LNG projects getting deferred, there is every reason to expect that low gas prices will persist and possibly get worse over the next few years.
