TOUGH LESSONS
Not first struggle for oilpatch
Canadian oil producers have attended the school of hard knocks for more than five years.
And companies already have a playbook on how to respond to the “train wreck” now engulfing the global energy sector.
One of the key chapters is to get out of the way, as much as possible.
Two of Canada’s largest oil producers rolled out steep first-quarter losses on Wednesday, highlighting the sharp drop in crude prices this year due to the fallout from the coronavirus pandemic and a global oil-price war.
Husky Energy posted net losses of $1.7 billion during the January-to-march period, while Cenovus Energy reported a $1.8-billion loss.
“It was ugly,” analyst Phil Skolnick of Eight Capital said of the first-quarter environment for the sector, calling it a “canary in the coal mine” for an even tougher period this spring.
“The environment is telling these companies to do what they have to do.”
Both Husky and Cenovus have reacted to the free-fall in oil prices by shutting in production, deferring growth projects, cutting dividends and slashing capital spending.
“Our strategy is to keep as many barrels away from the train wreck as possible, to minimize negative cash margins,” Husky Energy CEO Rob Peabody said Wednesday on a conference call.
One of the country’s largest integrated producers, Husky has already reduced conventional and thermal oil production by more than 80,000 barrels per day (bpd).
Company officials say they can quickly ramp up output and protect their oil reservoirs, having previously done so during the 2016 Fort Mcmurray wildfires and as part of the Alberta government’s mandatory curtailment program that began last year.
Peabody said it became clear during the first quarter that demand for oil products was falling due to the COVID-19 outbreak, setting up supply and demand forces to “collide in a very messy way.”
And collide they did.
Global demand for oil has been side-swiped by the virus, with the consumption of gasoline and jet fuel plummeting.
Benchmark U.S. oil prices slipped into negative territory for the first time ever this month, closing Wednesday at US$15.06 a barrel for West Texas Intermediate crude, up more than $2 on the day. Premier Jason Kenney told reporters the province expects to be dealing with a lowprice environment for 12 to 18 months.
Through its downstream refining operations, Peabody said Husky saw in the first quarter how fast product demand was falling. However, storage builds in the United States are starting to slow, he added.
“The good news is supply and demand in North America are going to equalize and meet over this quarter, because they have no options (as) the storage runs out,” he said.
“The market forces, as cruel as they are when you see negative pricing and things like that, are doing exactly what they are supposed to do, which is to send very clear signals to people in the industry as to what actions they should be taking.”
What does that action look like?
Husky has shut-in production, reduced refinery throughput, lowered its capital spending by almost half and reduced its dividend by 90 per cent.
Cenovus, one of the country’s largest oilsands producers, has temporarily suspended its dividend and crude-by-rail program, lowered its capital spending by $600 million and deferred major growth developments.
It has also throttled back output by about 60,000 barrels per day and is confident it can do so safely without harming its oil reservoirs.
“Inevitably, we know this pandemic will pass, the markets will recover,” Cenovus CEO Alex Pourbaix said on a conference call. “But what is not clear is exactly how long that’s going to take.”
Pourbaix said the company has been shoring up its liquidity, but noted some Canadian oilpatch players will need assistance from the federal government. Ottawa has been working on an industry aid package since last month, beyond the initiative for small and mid-sized energy firms announced by the Trudeau government earlier this month.
“This is not going to be very helpful if relief comes to the industry six months from now. This is a very urgent short-term issue,” he said.
One of the main issues facing the sector is the glut of oil that is backing up storage, forcing inventory levels higher.
Cenovus officials said Alberta oil inventory levels are now “essentially flat” as companies have been reducing output.
“The market right now is working. We’ve seen significant production come off in April and I think everybody is expecting that production to continue to fall in May,” Pourbaix added.
Canada has already shut in at least 400,000 barrels per day and the number may reach 700,000 bpd by June, said Mark Oberstoetter of energy consultancy Wood Mackenzie.
Wednesday’s results highlight how difficult the situation is for petroleum producers — and the next quarter results will be even worse. But analysts note the Canadian sector has become resilient since oil prices crashed from 2014 to 2016.
Inadequate pipeline capacity and lack of access to capital have forced companies to remain disciplined, spend within their means, lower operating costs and improve efficiency.
“Companies are going back into survival mode, but arguably Canada has been there and stayed there for five to six years,” said Oberstoetter. “They know the levers to pull.”
Knowing which lever to pull doesn’t mean companies are bulletproof and can withstand oil prices below $20 a barrel for a prolonged period.
But it does mean they have navigated through a prolonged downturn, and many are turning back to the familiar playbook to survive.