Lower costs, higher production oilpatch’s mantra for 2018: report
Projection marks reversal from trend amid fears increased oil prices will sink
Mid-size Canadian oil and gas companies continue to ramp up production while trimming back their capital spends, a trend that comes as the energy sector exits its third year in a commodity price slump that has forced firms to drive down costs.
Analysts at RBC Capital Markets expect the 29 companies in their “intermediate” category to ramp up production in 2018 by 15 per cent compared to this year, all while paring back spending seven per cent, according to a research note published Monday.
The projection marks a reversal from a persistent trend in recent years, when a collapse in commodity prices forced companies to slash their spending plans, causing production levels to taper off.
Now, a rise in oil prices is spurring higher production, even as companies maintain lower overhead costs — a shift that comes as a result both of higher internal cash flows, and companies’ ability to make their operations more efficient over the past three years.
It also comes amid fears that higher oil prices could begin to fall as global output levels rise, causing companies to maintain a cautious approach to future spending plans.
Over the third quarter, 27 of 29 intermediate companies also boosted cash flows per share by an average 10 per cent higher than analyst expectations, RBC analysis said. The two remaining companies, Bonavista Energy and Seven Generations Energy, will report earnings this week.
“We have noted a strong theme of budgets funded by internally generated cash flows which is resonating with investors, and which differs from the previous mantra of ‘growth at all costs’,” RBC analysts said in a recent note.
“However, we do expect upward revisions to most company budgets if commodity prices and access to capital improves in the medium term.”
Paramount Resources Ltd. raised its production 11 per cent higher than analyst estimates over the quarter, while NuVista Energy Ltd. and ARC Resources Ltd. outperformed production estimates by five per cent each.
That comes alongside rising production levels among major heavy oil producers, driven by new expansion projects coming online and debottlenecking efforts that have raised efficiency.
Canadian Natural Resources Ltd. said it would boost production 17 per cent in 2018, up to 1.13 million barrels of oil equivalent, all while cutting its spending plan by roughly $500 million. Oilsands rival Suncor Energy Inc. reported its highest-ever production of 739,000 bpd over the quarter, which will rise when its giant Fort Hills mine begins to come online. The company is expected to unveil its 2018 budget before the end of the year.
Rising production levels come as the Organization of the Petroleum Exporting Countries on Monday raised its oil demand outlook for 2018, citing stronger global economic activity.
The group now expects global demand for OPEC crude to reach 33.42 million bpd in 2018, up 360,000 bpd from its last estimate.
Futures contracts for benchmark crude West Texas Intermediate were trading around US$56.70 Monday. Brent crude was trading around US$63.10.
Analysts are now forecasting potentially higher crude prices after a years-long slump, mostly on higher demand and several consecutive years of lower spending by producers.
Martin King, the director of institutional research at GMP FirstEnergy in Calgary, wrote in a recent note that crude markets were “starting to show real signs of physical tightness and potential for prices to break out above recent long-standing ranges.”
Analysts remain skeptical over prices however, largely due to still-high production levels from U.S. shale producers and threats of softening global demand in coming years.
King expects total Canadian crude output to reach 4.1 million bpd in 2018, up from around 3.9 million bpd over 2017.