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Vol. 21, No. 5 Week of January 31, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Testing pain threshold

Facing credit downgrades, Canadian E&P companies step up production shut-ins


For Petroleum News

The thumbscrews in Canada’s upstream petroleum sector keep tightening as Moody’s Investors Service eyes a sweeping downgrade of 19 exploration and production companies amid unrelenting market turmoil and the prospect of even more cuts to capital budgets.

Having put several of Canada’s big oil players under review in December, Moody’s is now targeting a broad range of mid-size producers after cutting its outlook for crude “in light of continuing oversupply in the global oil markets and demand growth that remains tepid.”

“Iran is poised to add more than 500,000 barrels per day of global supply while OPEC and many non-OPEC producers continue to produce without restraint as they battle for market share,” the agency said.

“Lower oil prices will further weaken cash flows for E&P companies and the upstream portion of integrated oil and gas companies,” it said.

“This will cause further deterioration in financial ratios, including deeper negative free cash flow. Most companies are unable to internally fund sustaining levels of capital spending at currency market rates.”

Bank projects further cuts

The Bank of Canada said it expects companies to slash spending by a further 25 percent this year - on top of the 20 percent reduction it had previously forecast - while warning that producers are running out of options after chopping investment levels by 40 percent in 2015.

“Many firms indicate that neither they nor their suppliers are able to generate additional substantial cost savings or productivity increases in the short term,” the central bank said.

“Unlike conventional oil producers, oil sands producers find it difficult and expensive to scale back production, causing some to operate temporarily at a loss. With low oil prices persisting, firms anticipate more painful wage and staff cuts ahead.”

Chris Cox, an analyst at Raymond James in Calgary, said leading top-end producers such as Cenovus Energy, Canadian Natural Resources, Crescent Point Energy and PrairieSky Royalty could be part of a wave to cut payouts to preserve cash.

He said each incremental dollar of cuts in oil prices “makes a huge difference in terms of the financial positions of these companies and eventually forces much more rash actions.”

Clobbering the oil sands sector reached a new high in late January when heavy crude traded at a discount of more than 50 percent against West Texas Intermediate, when the Western Canada Select benchmark blended crude dropped below US$14 a barrel.

At the same time, a report said Canadian oil sands producers needed an average WTI price of US$39.37 a barrel for thermal projects and US$35.34 for mining projects to break even.

Protecting moves

That was accompanied by a series of protecting moves, as Martin King, an analyst at FirstEnergy Capital, said global economic concerns “suggest that supply shut-ins are needed and that future capex should be trimmed to the bone and beyond.”

Brian Tuffs, head of the Canadian operations of China’s Sinopec, said his company is faced with shut-ins after eliminating jobs and lowering capital spending.

Husky Energy, controlled by Hong Kong investors, said its capital budget was being reduced by another 27 percent to a range of C$2.1 billion to C$2.3 billion, while its dividend was being suspended. As a result, the company’s production guidance has been dropped to 315,000-345,000 barrels of oil equivalent per day, down from its earlier goal of 330,000-360,000 boe per day.

“We continue to take decisive action in this period of persistent supply-demand imbalance,” in line with Husky’s commitment to balance capital spending with cash flow, said Chief Executive Officer Asim Ghosh.

Whitecap Resources, a mid-size E&P, slashed its budget by more than half to C$70 million and its monthly dividend by 40 percent, while shrinking its production forecast to 37,000 boe per day from 40,000 boe.

Those looking for any hope got some from the notoriously expensive oil sands sector, with TD Securities estimating the average breakeven point for mining operations is down 21 percent from a year ago, while steam-powered plants are down 18 percent, although analysts note those gains are more than offset by oil prices.

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