Analysts warn more cuts may be necessary
CALGARY The Canadian oilpatch has cut nearly $10 billion in planned spending this year to counter the historic collapse in oil prices, but more may be needed to shore up company finances as dwindling demand for crude persists, warn analysts.
“The massive collapse in oil prices has dramatically impacted the financial strength of (Canada’s oil and gas producers), putting sustainability into question,” National Bank Financial Inc. analysts wrote in a research note on Friday.
The Canadian oil industry “will remain stressed” and forced to make further deep cuts to capital spending, dividend payments and executive compensation while looking for cost savings throughout their supply chains, analysts Travis Wood, Dan Payne and John Hunt wrote in a report published Thursday.
The COVID-19 pandemic has knocked out global oil demand as major economies have shut down and commuters stay home to prevent the virus from spreading. Oil demand is expected to fall by a record 8.6 million barrels per day this year, according to the International Energy Agency (IEA).
The grim outlook sent oil prices tumbling to an unprecedented -$37 per barrel at one point in April. The West Texas Intermediate benchmark price has rallied from those rock-bottom prices in recent weeks to US$29.58 on Friday.
At the same time, the Western Canadian Select heavy oil price was trading 6.6 per cent higher on the day to just under US$25.
Both of those benchmarks are still trading below what Canadian producers need to break even.
National Bank’s analysis shows that if WTI remains under US$30 per barrel for a sustained period, most Canadian oil companies could face liquidity challenges by 2022 without external funding.
“However, these companies have proven to be flexible in cutting capital programs, reducing dividend and adding new liquidity through debt markets and bank lines, which has improved the overall liquidity outlook,” the analysts wrote.
So far, Canadian companies have cut their budgets by an average of 40 per cent for a total of $10 billion, while dividends have been cut by an average of 82 per cent for a total of $2.4 billion, the bank estimates.
Even with those cuts, the industry is looking at a free cash-flow deficit of $25.3 billion, while also facing $6.5 billion in debt maturities by the end of 2021. Those two factors “will continue to create a dynamic where liquidity needs to be addressed.”
The massive collapse in oil prices has dramatically impacted the ... strength of (oil and gas producers).
Overall, the analysts estimate that large and small Canadian oil and gas producers will see their debt balloon between 20 per cent and 25 per cent in the coming years as a result of the twin crisis of high inventories and low demand.
In a separate note, RBC Capital markets pegged total spending cuts by Canadian producers a bit lower, at $6.9 billion, or around eight per cent of the total spending cuts of $80 billion orchestrated by the global oil industry to stem the price slide.
A research note from the bank shows Canadian oil producers initially planned to spend $16.6 billion this year, but the pandemic has forced them to cut spending by 42 per cent leaving them with capex of $9.7 billion.
Half of the spending cuts in Canada have come from major producers, such as $1.3 billion by Suncor Energy Inc., $1.26 billion from Husky Energy Inc. and $1.16 billion by Canadian Natural Resources Ltd.