It’s not often a sampling of opinion within the Canadian petroleum industry will come up with the same answer.
But that’s the way it is in these jumpy times as exploration and production companies roll out their 2015 capital budgets, all of them edging - if not leaping - toward safety from the collapse of oil prices, although all have their variations and idiosyncrasies.
But with oil sitting around a five-year low, the companies are slashing budgets, pointing to a long period of weak prices, compounded by opposition from First Nations, environmentalists and regulatory agencies.
Phil Flynn, a futures account executive with Price Futures Group in Chicago, said there seems to be a realization that the price war coupled with an oversupply will not disappear any time soon.
The bean counters in the Canadian oil patch are responding accordingly.
Canadian Natural Resources (Canada’s third largest all-round producer), Penn West Petroleum (a robust independent producer that, like so many of its peers, is immersed in restructuring), MEG Energy (whose major shareholders include China’s CNOOC), Athabasca Oil (which sits on a healthy pile of cash) and Precision Drilling (which contracts one of North America’s largest rig fleets) have all delivered their version of reality, none of which will fuel optimism.
Canadian Natural’s contrarian approach
Canadian Natural frequently takes a contrarian approach to business, notably by cutting back exploration and production of its whopping natural gas resources a few years ago when other big gas players were hell-bent on chasing the pot of gold at the end of the shale rainbow.
Again it has caused some head-scratching by raising its gas spending for 2015 by 15 percent to C$920 million compared with the C$480 million (down 29 percent from this year) it plans to spend on Canadian light oil.
The renewed interest in gas poses an added puzzle, given that the company had an unsuccessful bid to unload 6.7 trillion cubic feet of gas reserves in the first quarter of 2014, then startled observers by paying C$3.1 billion for Devon Energy’s gas output of 383 million cubic feet per day, lifting its output to 1.7 billion cubic feet per day.
What it now plans to spend in 2015 is targeted to hike its 2015 production forecast by 11 percent, possibly enticed by the knowledge that each C$1 rise in the AECO trading hub price generates C$420 million of extra annual cash flow.
Canadian Natural is also pressing ahead in its oil sector, budgeting C$4.2 billion for heavy assets and C$3.4 billion for its troubled Horizon oil sands mine, resulting in an overall spending program of C$8.6 billion, which is down a telling C$3.4 billion from the expected outlay in 2014.
Penn West budgeted early
Penn West may have entered the arena too soon in mid-November when it approved a capital budget of C$840 million, using a US$86.50 per barrel West Texas Intermediate price as its target, with C$585 million earmarked for three core resource plays in Alberta (Cardium, Viking and Slave Point).
Its light oil capital allocations will continue to include integrated investment to advance its waterflood programs.
But the company has an overriding objective of trimming down, having generated C$1 billion in asset sales this year, shrinking its cash costs by 23 percent, or C$200 million, by slashing its management structure in half. The goal now is to reach operating costs of C$15 per barrel of oil equivalent by 2019.
Production guidance for 2015 is set at 95,000-105,000 boe per day, compared with an expected 101,000-106,000 boe per day this year.
Penn West, trying to put the best face on the outlook, said its in-house “rigorous sensitivity analysis” suggests it has a long-term plan that is “resilient to commodity price fluctuations that are common to the oil and gas industry.”
In case that assessment doesn’t hold up, the company said it has actions ready to deal with any further commodity price weakness, applying its control over 90 percent of its capital investment allocation decisions.
MEG from ‘greenfield’ to ‘brownfield’
MEG, a relative oil sands startup, has cut its capital spending by 25 percent to C$1.2 billion (down C$600 million from its earlier guidance) as it shifts ground from “greenfield” plans for new projects to “brownfield” expansions of existing operations.
Chief Executive Officer Bill McCaffrey said the revised program shows MEG’s ability to “adapt to the current market conditions while still delivering meaningful growth.”
He said MEG only needs to rely on 20 percent of its budget to maintain current production, expected to average 65,000-70,000 barrels per day this year and aimed at 78,000-82,000 bpd in 2015.
Raymond James analyst Chris Cox said MEG should be able to fund 60 percent of next year’s budget from operating cash flow and use the C$800 million of cash on hand to cover residual funding requirements, suggesting the company is taking “prudent” steps in the current commodity environment.
Athabasca scales way back
Athabasca Oil surprised some analysts by setting a spending target of C$266 million for 2015 (including C$58 million of unspent capital from this year) compared with the C$450 million-C$500 million target range set for 2014.
The company has also scaled back its production forecast to 7,000-8,000 barrels of oil equivalent per day for 2015 from its northeastern Alberta conventional light oil assets and 3,000-6,000 bpd from its nearly completed Hangingstone thermal-recovery oil sands operation.
Nick Lupick, an analyst with AltaCorp Capital, said the spending is 10 percent below his latest expectation, indicating management has decided the market volatility “warrants a slightly more cautious and calculated spending program.”
Athabasca, boosted by the sale of its Dover oil sands lease to PetroChina, is expected to have C$1.3 billion in available cash, undrawn credit and promissory notes by Dec. 31, suggesting it is well-funded for 2015 and beyond.
Precision trims cap-ex
Precision has trimmed its 2014 cap-ex by C$23 million to C$885 million and plans to wield the axe even more vigorously in 2015 by lowering spending to C$493 million, reflecting the edginess within the oilfield services and production sectors.
Chief Executive Officer Kevin Neveu said that once 16 previously announced rigs (15 destined for the United States by mid-2015) have been delivered he expects “our rig building activity will be idled until we see an improved commodity price environment and rising customer new-build demand.”
“While the current market is adjusting to recent rapid oil price declines, we remain intensely focused on cost management with a variable cost business model and balance sheet designed to address changing market conditions,” he said.
