Oilpatch begins to tighten spending — again
Canada’s largest oil and gas producer just joined the million-barrels-a-day club and posted a billion-dollar profit during the second quarter.
Canadian Natural Resources Ltd. also trimmed its capital spending plans for the year.
It’s another signal that oilpatch players — both in Canada and abroad — can turn a profit in today’s sluggish commodity price environment, but remain cautious about the fickle state of oil and gas markets.
Fresh off its blockbuster $12.7-billion acquisition of Marathon Oil and Shell Canada oilsands assets earlier this year, Canadian Natural Resources reported strong second-quarter results Thursday, with net earnings of $1.07 billion.
Total output averaged 913,000 barrels of oil equivalent (boe) per day. The company punched through the milestone of producing one million boe/d in June.
Like much of the sector, Canadian Natural entered the year looking at the prospect of stronger oil prices after a downright miserable 2016, when crude sank below US$30 a barrel and losses piled up.
The company, which is completing an expansion of its Horizon oilsands project, set a $3.9-billion capital budget in place.
The senior producer also gave itself the flexibility to crank up spending by $525 million, or roll it back by as much as $900 million, when it unveiled the plans last December.
On Thursday, the company lowered its 2017 capital program by about $180 million.
“We’ve reduced some of the capital spending this year, mainly at Horizon. The rest of the capital budget we’ll probably execute as planned,” company president Steve Laut told a conference call. In an interview, Laut said it’s more effective for the company to push some capital spending on the Horizon project into next year.
Canadian Natural Resources has no plans to cut spending on exploration and production drilling in the second half of this year, nor increase it.
“I think there’s too much uncertainty (in commodity prices) and at this level, we won’t be increasing the capital budget,” he said.
Most petroleum producers set their budgets in the fall and it’s not uncommon to see companies make adjustments mid-year to reflect gyrating commodity prices. Producers also want to maintain flexibility, in case their plans shift and they need to pivot.
Canadian Natural Resources isn’t the only company that has adjusted spending levels in recent weeks.
Imperial Oil has chopped its 2017 spending plans by $200 million, to about $800 million, in part due to cost savings and productivity gains.
Tourmaline Oil Corp. is on track to spend $1.3 billion this year, as planned, but has lowered its capital expenditures for 2018 by about 15 per cent, to $1.5 billion, CEO Mike Rose said Thursday.
Earlier in the week, Baytex Energy Corp. tightened its capital budget this year to around $320 million, down five per cent from earlier estimates.
“To the extent (companies) can, they are probably cutting,” said analyst Dirk Lever with AltaCorp Capital. “We are at the halfway point and guys can see where the commodity prices are headed for the next six months.”
Internationally, a similar trend is unfolding.
Norway’s Statoil recently lowered its exploration spending, while U.S. producers Anadarko Petroleum and ConocoPhillips reduced their budgets.
With oil stuck below US$50 a barrel for much of the year — West Texas Intermediate crude closed Thursday at $49.03 a barrel — producers are trying to match their exploration and development programs with cash flow levels.
“There was a greater sense of optimism coming into 2017 that really hasn’t unfolded,” said Baytex senior vice-president Brian Ector. “Companies are adapting to the current reality of $50 or sub-$50 oil.”
Mike Dunn, director of institutional research at GMP FirstEnergy, noted the newly announced decisions to chop spending were likely made by producers in June, when prices floundered below US$45 a barrel.
He noted even with less money being spent, some companies are able to meet or exceed their production guidance as technological investments have led to improved well productivity.
It’s also important to note the trend of tighter budgets isn’t happening across the board.
Suncor Energy has boosted its capital spending for this year by $500 million to about $5.5 billion as it accelerates the pace of work on its massive Fort Hills oilsands development.
Seven Generations Energy said Thursday it would keep capital spending plans intact between $1.5 billion and $1.6 billion.
All this fluctuation makes planning tricky for Canadian drillers and oilfield service companies that rely on petroleum producers for work.
The head of the Canadian Association of Oilwell Drilling Contractors said the sector is seeing a dichotomy in 2017. While there’s an increase in drilling work, the rates companies can charge customers remain depressed.
“We are just still in a very, very fragile market,” said CAODC president Mark Scholz.
“Hopefully, we can get over the barrier of $50 and it’ll give our clients ... some confidence down the road, so they can start opening up the purse strings again.”
Heading into the back half of the year, the sector is keeping one eye on its bottom line, another on oil and gas prices.
For many, the purse strings are drawing a little bit tighter.