Sign Up for FREE Daily Energy News
WEC - Western Engineered Containment
Copper Tip Energy Services
Hazloc Heaters
Copper Tip Energy
WEC - Western Engineered Containment
Hazloc Heaters

Oil Rout Tests Canadian Energy Producers’ Cost-Cutting Drive

By Kevin Orland and Robert Tuttle

(Bloomberg) The global oil price war may take a heavy toll on the Canadian energy industry, which still hasn’t fully recovered from the last crash that started in 2014.Canadian producers were struggling with a shortage of pipeline space that has weighed on local crude prices and limited their growth prospects, even before Saudi Arabia announced plans over the weekend to boost oil output. Western Canada Select, the benchmark grade produced by Canada’s oil sands, was down about 26% to $20.69 a barrel on Monday, in line with the drop for West Texas Intermediate.

Canadian producers, particularly those focused in the higher-cost oil sands, have spent years trying to make their operations more efficient. They’ve also curtailed capital spending and worked to repair their balance sheets. Now those efforts will be put to the test.

“At these commodity prices, nobody is making money and everybody is going to be free cash flow negative,” said Laura Lau, chief investment officer at Brompton Corp. in Toronto. “It’s going to be tough.”

The oil decline hammered Canadian energy stocks. The 30-company S&P/TSX energy index plunged as much as 22% Monday, its biggest intraday decline in Bloomberg data stretching back to 1988. Among the biggest decliners were Cenovus Energy Inc. and MEG Energy Corp., which both tumbled more than 50%.

Canadian oil has lagged U.S. benchmark prices since 2014 crash

To be sure, the long period of retrenchment leaves some Calgary-based producers better prepared for the current crisis than they were for the 2014 crash, which saw U.S. crude prices plummet from above $100 a barrel in July 2014 to about $26 less than two years later.

For example, Suncor Energy Inc., Canada’s largest integrated oil company, last month reported a cash operating cost of C$28.55 per barrel in its oil sands operations last quarter, down 17% from five years ago. The company has net debt of 1.22 times its earnings before interest, taxes, depreciation and amortization, down from 1.49 times in 2015, according to data compiled by Bloomberg.

Canadian Natural Resources Ltd. had adjusted cash production costs of C$21.05 a barrel in 2018, down 43% from C$37.18 in 2014. The company had net debt of two times its Ebitda at the end of last year, down from three times in 2015.

Below Break Even

Canadian energy companies “are better equipped today than their U.S. counterparts,” Darrell Bishop, an analyst at Haywood Securities, said in a note. “While in 2014, U.S. companies levered up with higher-yield debt for growth, Canadian companies cut spending and growth plans and focused on getting balance sheets in order.”

However, it remains to be seen how deep the current decline will go and how long it will last. Any severe, prolonged downturn in prices would hurt Canada, which depends on the energy industry for about 10% of gross domestic product and a fifth of its exports.

Oil sands producers will rarely shut in operations amid depressed prices because many of their costs are fixed and shutdowns can damage reservoirs. Some may try to prolong maintenance work on their facilities while prices are depressed but they have cut operating costs about as much as they can since the last downturn, Mark Oberstoetter, lead analyst for upstream research at Wood Mackenzie Ltd. in Calgary, said by phone.

“They have done all they can on the cost front,” he said. “They will just have to operate at a loss for a while.”

Cenovus, one of the hardest hit Canadian oil sands producers, said it is “well positioned” to handle the price drop.

“We believe the best hedge against commodity price volatility is a strong balance sheet and a low cost structure, and Cenovus is well positioned for that,” Sonja Franklin, a spokeswoman, said in an email. Since 2014, the company has reduced operating costs by about 40% and sustaining capital costs by 70%.

Oil prices this low will hurt other oil countries, including the U.S., Russia and Saudi Arabia, Randy Ollenberger, an analyst at Bank of Montreal, said in an interview on BNN Bloomberg Television. About a third of U.S. exploration and production companies need WTI prices of $55 a barrel to break even, and with prices at their current levels — WTI was trading at about $33.50 at 11 a.m. Eastern time — some of those companies may go under, sowing the seeds of a price recovery, he said.

“The industry simply doesn’t work at these prices,” Ollenberger said. “I don’t just mean U.S. shale or Canadian oil sands. I mean the industry globally doesn’t work at these prices.”

Share This:

More News Articles

New SHOWCASE Directory Companies


CDN Controls
Insight Analytical
Challenger Geomatics
Caliper Inspection
Canline Pipeline Solutions
Gemini Fabrication
Environmental Mats
DyCat Solutions