OILPATCH BRACING FOR A CHILLY WINTER
Significant price discounts fuel layoffs, budget cuts and weaker oilfield activity
The pain from heavily discounted Canadian oil is beginning to be felt by energy companies as they trim budgets, dividends and head counts.
Trican Well Service Ltd., a Calgary-based fracking company that pumps pressurized water and sand into wells to stimulate oil and gas production, anticipates current discounts for Canadian oil will lead to lower oilfield activity during the all-important winter drilling season.
“We have laid off 70 out of our 2,200 employee base this week,” Dale Dusterhoft, Trican’s president and CEO, said in an email Thursday. “The layoffs are in relation to the anticipated slowdown in 2019 due to our customers realizing less commodity prices due to lower oil and gas prices and higher differentials.”
Trican is not alone in preparing for a slower winter, when oilfield services activity ramps up for the year.
“We’ve already started to see some drilling programs drop off,” said John Bayko, Canadian Association of Oilwell Drilling Contractors vice-president, communications. “I know that things are slowing down.”
Bayko said the slowdown could mean another lost winter for service companies, if the oil and gas differentials persist.
Investment broker Peters & Co. said in a note this week that drilling activity has declined by about 10 per cent in recent weeks and expects it to “weaken further over the course of December, a function of budget exhaustion and the curtailment of capital spending.”
Oil and gas producers, meanwhile, are in the process of deciding how much to spend in 2019 and that could cause further pain for drilling and other oilfield services providers, he said.
“Depending on how they want to allocate their capital, if there isn’t money to be made, I wouldn’t expect they would want to continue their programs,” Bayko said.
Bonterra Energy Corp. said Thursday it is slashing its monthly dividend from nine cents per share to one cent per share after the price it received for a barrel dropped from $77.20 per barrel to $21.50 per barrel between the third and fourth quarter of the year.
The discount for Canadian heavy oil was US$34.09 per barrel at Wednesday ’s close, while the discount for light oil, recorded as Edmonton Par, was US$27.34 per barrel relative to the West Texas Intermediate benchmark, according to AltaCorp Capital.
Bonterra, which produces oil in British Columbia and Saskatchewan, said it will adjust next year’s budget in accordance with commodity prices.
“Given the current macro environment, we are not surprised with the announcement and in fact applaud the decision to take measures early (and not in halfmeasures as well) despite how the share price is performing post cut,” Raymond James analyst Jeremy McCrea said in a research note.
Bonterra shares dropped three per cent to $8 each following the announcement Thursday.
CIBC Capital Markets says some of the large and integrated companies will release 2019 budgets in the coming weeks, but expects smaller and mid-cap players and oilfield service to hold off till midJanuary when the industry has had the chance to absorb the damage by the differentials.
“And even then we expect most budgets to likely only be for H1/19 development plans when announced,” CIBC analysts said in a note earlier this year.
Jackie Forrest, ARC Energy Research Institute vice-president of research, said she expects spending will decline next year.
“If we don’t see a change here in the next few weeks in terms of differentials or an increase in the global oil price, the activity levels are very likely to be lower than in 2016,” Forrest said, adding that 2016 was the lowest year for oilfield services activity since the 1990s.
“Definitely, we’ll see layoff in the services sector,” she said.
ARC Energy estimates oil and gas companies spent $28 billion on conventional oil and gas production in each of 2017 and 2018, but the figure will drop in 2019.
“There just isn’t enough cash to support that level of spending. So that will result in a lot of job losses in the drilling and service sector if we don’t see a change here in a short while,” she said.
Alberta Premier Rachel Notley has called the situation a “crisis” and announced this week she would buy new trains to move an additional 120,000 barrels of oil per day out of the province.
On Thursday, in a speech in Toronto, Noltley said the province will need to buy as many as 7,000 railcars if it wants to be able to meet its shipping goal. It was the first time she has specified how many railcars will need to be purchased. She did not give estimates on the cost of the cars but industry experts suggest that one rail car can cost between $120,000 and $150,000 to buy or about $1,200 per month to rent, putting Alberta’s plan at upwards of $1.05 billion.
The trains are expected to begin moving next year.
In the meantime, Notley also hasn’t ruled out forcing oil companies to curtail their production in an effort to lift prices, which could provide a short term solution to the oil differential.