‘Seriously damaged’ rail economics results from Alberta oil cuts: Suncor
As a glut of oil in storage grows once again, Suncor Energy Inc. warned Wednesday that oil-by-rail economics are “seriously damaged” because of Alberta’s move to scale back oil production.
“I’m guessing that this curtailment will be pulled back quite rapidly to make sure that rail economics can work,” Suncor CEO Steve Williams said on an earnings call.
Canadian oil companies need a discount of more than US$15 per barrel for domestic crude relative to U.S. benchmarks to justify the cost of shipping their barrels on railway cars. The discount has fallen below that hurdle since Alberta ordered large companies to scale back production by 325,000 barrels per day in December.
Suncor, Canada’s largest oil company by market capitalization, predicted the narrowing discount for Canadian oil and resulting “seriously damaged” rail economics would lead the Alberta government to lift its curtailment order earlier than planned.
The province eased its curtailment order by 75,000 bpd last week, citing a 14-per-cent drop in oil storage levels in the province as evidence the decision to intervene in the market has helped clear a glut of crude in the province.
However, new data from energy research firm Genscape, Inc. shows oil storage inventories have been building in the province once again. Oil in storage increased by seven per cent in the last week of January, to 33 million barrels from 30.8 million barrels. Alberta’s total oil storage now is at 55 per cent capacity as fewer barrels of crude are leaving the province on railway cars.
Imperial Oil Ltd., which has been among the largest oil-by-rail shippers in recent months, said last week that it was cutting rail shipments of crude from 168,000 bpd in December to zero this month as a result of the curtailment.
Williams said he has advised the Alberta government to “start planning for what we call a soft landing or more of a soft exit” to the curtailment order, which has had a minimal impact on Suncor because of its refining business and access to pipelines. Rival oilsands companies are more exposed to volatile commodity prices and pipeline constraints and Williams said Suncor is looking out for opportunities to buy assets amid the distress.
“This market is probably going to throw up some opportunities over the next 12 to 24 months,” he said.
Suncor could be interested in acquiring stakes in oilsands projects from U.S. companies such as Devon Energy Corp. or oilsands assets from international firms such as Paris-based Total S.A., said Edward Jones analyst Jennifer Rowland.
“They’ve been a very acquisitive company but they’ve always done it at the right time, at the bottom,” Rowland said of Suncor. “They’re not the kind of company that is going to do a deal just to do a deal. I think they’ve demonstrated that in the past.”
Rowland also said that Suncor likely didn’t pursue MEG Energy Corp. which fended off Husky Energy Inc.’s hostile takeover bid, as it was debt-laden.
Williams and other executives said Wednesday Suncor’s balance sheet was in “great shape” and insisted the company didn’t want to stretch itself financially, even as it hiked its share buyback program from $2.15 billion to $3 billion.
Suncor showed that it benefited from its “fully integrated business,” according to Travis Wood, analyst at National Bank Financial, as it boosted its quarterly dividend 17 per cent to 42 cents per share.
Suncor swung to a loss in the fourth quarter of 2018, posting a net loss of $280 million compared with net earning of $1.38 billion during the same period a year earlier. It said much of the difference was due to a $637-million after-tax foreign exchange loss. It also boosted its oil production to a new record of 831,000 barrels of oil equivalent per day in the quarter, up from 736,000 barrels of oil equivalent per day at the same time a year earlier.