Analysts weigh in on oil cuts
ALBERTA CRUDE PRODUCTION CUTS EXPECTED TO CREATE WINNERS AND LOSERS: ANALYSTS
Oil production cuts announced by the Alberta government will have the desired outcome of reducing steep price discounts on western Canadian crude, but will also create winners and losers, financial analysts say.
Shares in the companies most likely to benefit from the move to curtail crude production starting Jan. 1 soared Monday as oil price differentials plunged.
Meanwhile, shares in oil producers who had been either benefiting or insulated from the discount prices stayed put or subsided.
“There are going to be a number of producers who will shoulder the brunt of the Alberta government’s 325,000 barrels per day in mandated production curtailments of raw crude and bitumen (namely the oilsands producers),” Calgarybased AltaCorp Capital said in a report.
“But the broader health of the province is likely to benefit over the medium term from the decision as a result of narrowing differentials and stronger royalty revenue.”
Alberta Premier Rachel Notley announced Sunday the province will require companies producing more than 10,000 barrels per day of oil to cut back by about 8.7 per cent (a total of 325,000 bpd) until there is enough shipping space on pipelines to improve prices, expected to take about three months.
After that, the reduction will be lowered to 95,000 bpd through the rest of 2019.
Of the 378 operators with active oil production in Alberta in October, only 25 produce more than 10,000 bpd, AltaCorp noted.
In early trading Monday, Cenovus Energy Inc. rose as much as 13 per cent over its Friday close to $11.11, while Canadian Natural Resources Ltd. rose 16 per cent to $38.74. At 2 p.m. ET, the shares were up 9.4 and 8.5 per cent, respectively.
On Sunday, both Cenovus and Canadian Natural issued statements of support for the Alberta move, as did Chinese-owned oilsands producer CNOOC-Nexen.
“I think any time that government has to step in to fix a market, it’s never a time for celebration,” Cenovus CEO Alex Pourbaix said in an interview Monday, adding he’s more “relieved” than pleased with Alberta’s decision to go along with his call for the cuts last month.
Calgary’s major integrated companies — those that both produce and refine oil — including Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Inc., said in statements they remain opposed to the cuts.
Suncor was down 1.5 per cent, while Imperial fell 4.1 per cent and Husky shares were off 0.8 per cent in afternoon trading.
Imperial CEO Rich Kruger warned of the danger of “unintended consequences” of the production cuts, including to competitiveness and trade.
Husky also mentioned possible “serious negative investment, economic and trade consequences.”
But Cenovus consulted experts on the trade issue and believes the cuts are allowed, Pourbaix said.
“This is not targeted at a country,” he said. “Every pipeline going to the U.S. was full before this decision and every pipeline will remain full after this decision.”
The discount between Western Canadian Select bitumen-blend oil and New York-traded West Texas Intermediate varied between US$19.75 per barrel and US$22.25 on Monday, an improvement over Friday’s US$28.50 settlement price, according to Net Energy.