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Hope amid gloom: big chunks from O&G capex; sands down 1%
Regardless of how much forecasts vary, analysts expect big chunks will be taken out of capital spending by Canadian oil and natural gas explorers and producers in the New Year.
Calgary-based investment bank Peters & Co. predicts budgets will be slashed by C$20 billion to C$36 billion, while CIBC World Markets projects that conventional oil and gas spending will be down by 12 percent to C$36.5 billion.
CIBC also lowered its Canadian drilling activity levels by 13 percent, prompting it to sharply shrink its 12-month outlook for Precision Drilling and Ensign Energy Services - Canada’s two largest contract drillers.
It now has its sights set on C$12 a share for Precision from an earlier target of C$16.50, while Ensign has been lowered to C$14.50 from C$17.
Those targets are based on an average West Texas Intermediate price of US$90 per barrel and a gas price of C$3.79 per thousand cubic feet at the AECO trading hub in Alberta.
Even so, CIBC maintains an “overweight” rating for the drilling sector, listing Precision as one of its top picks.
Peters slashed its estimate for producer cash flow in 2015 by 20 percent to C$14 billion, but it shares CIBC’s hopes for the longer term.
“Financial flexibility for most of our coverage universe remains strong, positioning companies to potentially capitalize on opportunities in the upcoming downturn,” the firm said.
Precision had earlier reduced its capital budget by 44 percent to C$885 million and halted its new rig construction program until there was an “improved commodity price environment and rising customer new build demand.”
Ensign shelved construction of 17 of its patented robotic rigs and lowered its capital budget to C$340 million from an earlier C$450 million-C$500 million, suggesting that would “better align cash flows with expenditures during this challenging market period.”
1% oil sands dip A new CIBC report predicted oil sands capex will dip by only 1 percent to C$22.7 billion, while Peters is counting on a mere C$200 million drop to C$27.9 million from its earlier forecast.
It is well recognized that the oil sands are among the most expensive undertakings in the global petroleum world, with the Canadian Energy Research Institute setting supply costs for an integrated oil sands mine at C$71.81 per barrel and C$50.89 for a thermal recovery project.
An integrated mine and upgrader are now forecast to need returns of C$107.57 per barrel to generate a 10 percent return, although established operations need WTI prices of US$62.50 to break even and generate 9 percent returns.
CERI also noted that oil sands operations face fixed sustaining costs of C$5 per barrel, whether oil prices rise or fall, while the costs of maintaining existing facilities will average C$8 billion a year over the next 25 years.
Suncor Energy Chief Executive Officer Steve Williams told analysts that it makes no sense for his company to stop work on its new Fort Hills mine during the slump in commodity prices, arguing that stopping and starting projects is a “very inefficient way of spending capital,” but if WTI prices stumbled to US$40 “we’d have to reflect. But right now, nothing we see will cause us to change course on our capital budget” of C$7.5 billion.
- Gary Park
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