Husky deal saves Cenovus, CEO says
Canadian oil producers will benefit from Biden's executive orders, Pourbaix says
Executive orders from U.S. President Joe Biden on the energy file will hurt the American oil industry and provide a boost to Canadian crude producers, says the head of Calgary-based Cenovus Energy Inc.
Since taking office last week, Biden has signed a long list of executive orders aimed at combatting climate change and reducing emissions, including a ban on drilling on U.S. federal land that was sharply criticized by the American Petroleum Institute, a U.S. lobby group for the oil industry.
“I don't think anyone in our industry should take any pleasure in seeing our industry peers, you know, having challenges, whether it's by political decree or otherwise,” Cenovus president and CEO Alex Pourbaix said on an investor
call Thursday. “But, yeah, directionally those are helpful for the Canadian industry.”
Over the past decade, U.S. oil companies had been outperforming their Canadian peers and have experienced explosive growth through shale drilling in the Permian basin first under former Democrat president Barack Obama and then the pro-energy policies brought by the recently ousted president Donald Trump. The Canadian industry, meanwhile, had struggled to attract investors as a result of depressed heavy oil prices and a lack of new export pipelines.
But the COVID-19 pandemic and oil price crash in 2020 caused a “massive disruption in capital spending” by U.S. producers last year, Pourbaix said. The fallout from that oil price crash and the election of Biden “create the opportunity for a positive situation for Canadian heavy.”
Still, Biden's executive order to kill TC Energy Corp.'s 830,000-barrels-per-day Keystone XL pipeline, also known as KXL, on his first day in the office is a “tragedy” for the Canadian oil industry, said Pourbaix who previously was an executive at the pipeline company. “This is certainly the most exhaustively reviewed project in the history of pipelines from an environmental perspective,” Pourbaix said. “You're already seeing the impact on thousands of workers in Canada and the U.S. It certainly was not happy news and I think unnecessary, unwarranted and damaging for both countries.”
However, Cenovus's acquisition of Husky Energy Inc. reduces the company's need for the Keystone XL pipeline because it will be able to send more of its own crude oil production to Husky refineries in the United States. The deal closed earlier this month.
“The large majority of our production we can find a home for and we no longer need to sell at Hardisty (Alberta) and be exposed to that light-heavy differential in the (Alberta) province,” Pourbaix said.
Barrels of Western Canadian Select heavy oil traded at US$39.81 on Thursday. By comparison, the West Texas Intermediate benchmark traded down roughly one per cent to US$52.34 per barrel by close Thursday.
The company has now become “fully integrated, from wellhead to the refinery gate,” ATB Capital Markets analyst William Lacey wrote in a Monday research note.
However, Cenovus announced on Thursday that the cost to rebuild its Superior Refinery in Wisconsin is now projected to cost $950 million, rather than a previous estimate of US$750 million, and the project will not be finished until the first quarter of 2023, rather than previous expectations it would be completed next year. The company expects to spend between $520 million and $570 million rebuilding it this year.
The refinery exploded in April 2018, less than a year after Husky purchased the 50,000-bpd facility for $435 million in Aug. 2017.
Cenovus also announced Thursday it planned to spend between $2.3 billion and $2.7 billion this year, which is almost three times what the company spent in 2020. When oil prices crashed in March last year, Cenovus slashed its budget from $1.4 billion to $950 million as the company focused its efforts on controlling costs.
The budget “reinforces the merits” of the Cenovus-Husky merger because it shows the combined company can generate cash with fewer expenses than as an independent company, National Bank Financial analyst Travis Wood wrote in a research note Thursday.
Cenovus expects to cut $1 billion in costs this year following the Husky merger, which Pourbaix said will lead to layoffs for 20 per cent to 25 per cent of the combined company's staff, affecting over 2,000 jobs primarily in Calgary.