Windsor Star

Alberta prepares aid as oilpatch shaves budgets

Plummeting prices force companies to make dramatic capital spending cuts

- GEOFFREY MORGAN

Canadian Natural Resources Ltd., the country’s largest oil and gas producer, is asking its management and employees to take a pay cut while it slashes spending by $1 billion and implements a hiring freeze to cope with rock-bottom crude prices.

The Calgary-based company is among oilsands producers, including MEG Energy Corp., Husky Energy Inc. and Cenovus Energy Inc., that have been forced to cut budgets dramatical­ly as Western Canadian heavy oil prices have fallen below the operating costs for most of the sector.

Across the sector, companies have announced capital spending cuts of between $5.2 billion and $6.4 billion this year, Bloomberg reported Thursday as companies enter survival mode.

Alarmed by the downturn, the Alberta government is expected to take steps as early as Friday to help oil and gas producers, the Financial Post has learned.

Canadian Natural announced late Wednesday it would cut its budget by over $1 billion to $2.96 billion in planned spending for the year.

But it said it planned to implement those cost reductions without reducing overall production for the year, which is still expected to be between 1.14 million barrels of oil equivalent per day and 1.2 million boed per day.

The Financial Post has also learned that Canadian Natural has implemente­d a hiring freeze, is cutting salaries across the company and asking its suppliers to cut fees.

Canadian Natural president Tim Mckay’s salary is being cut 20 per cent, while other members of the management team will see a 15 per cent pay cut and all vice-presidents will have their pay cut 12 per cent.

“This will only impact our salaried employees with reductions in the range of 0 to 10 per cent and more of the impact will be on higher salaried individual­s,” CNRL spokespers­on Julie Woo confirmed in an email, adding the company “does not intend at this time to undertake employee reductions due to economic reasons in response to the current low commodity price environmen­t.”

Cenovus Energy spokespers­on

Brett Harris said in an email the company is “monitoring the situation daily and are continuing to look for additional opportunit­ies across our business to further reduce capital and operating costs, if necessary.” Last week, as oil prices collapsed, the company cut its budget by 32 per cent, or by between $300 million and $500 million.

Cenovus shares have been particular­ly hard hit because the company did not have hedges in place to mitigate the fall in oil prices, analysts say.

On Thursday, shares in Cenovus traded up two per cent to $2.36 each, which is roughly a third of the price prior to the oil price collapse on March 9.

The first step in a provincial government plan for relief for the embattled industry is scheduled to be announced Friday morning, sources with direct knowledge of the matter said.

Alberta Premier Jason Kenney had previously said the government is willing to use stricter production limits for oil to lift prices and protect government revenues, which were directly affected by low commodity prices.

Canadian Natural and Cenovus both supported the provincial government implementi­ng a curtailmen­t program at the end of 2018 — the last time Canadian heavy oil prices collapsed; Canadian Natural continues to support curtailmen­t given the current price collapse.

“The curtailmen­t program remains an important tool for the province,” the company said in an emailed response to questions.

“The province was reviewing the curtailmen­t program on a monthto-month basis, we expect that this review will continue and appropriat­e action taken to protect jobs and revenues in Alberta.”

As global oil prices have collapsed in the last two weeks, the Canadian industry has been hit particular­ly hard as Canadian heavy oil prices have fallen below US$10 per barrel this week, substantia­lly lower than average breakeven operating costs in the industry.

“The worst of this may not be here yet,” said Kevin Birn, vice-president of North American crude oil markets at IHS Markit.

“We’re really in uncharted waters as the situation that precipitat­ed this, the coronaviru­s, is still in growth mode and that’s sapping the global demand for transporta­tion fuels.”

Edward Morse, global head of commoditie­s research and managing director at Citi Group, dramatical­ly lowered his forecasts for oil prices in the second quarter this week to US$17 per barrel for the Brent benchmark.

In its bear-case scenario, Citi forecasts the global Brent crude benchmark could average just US$5 per barrel in the second quarter.

“Given radically deepening contangos and storage congestion, some pricing points could even see prices below zero,” Morse wrote.

Brent usually trades at a premium to West Texas Intermedia­te, which in turn, trades at a US$12 to US$20 premium to Western Canada Select.

WCS staged a rally of nearly 40 per cent to $12.75 per barrel on Thursday, after falling below US$8 at one point on Wednesday — its lowest point ever.

The collapse in crude prices creates “a very challengin­g operating environmen­t for Canadian oil and gas companies,” BMO Capital Markets analyst Randy Ollenberge­r wrote in a research note Thursday, which noted Canadian oil producers need an average crude price of US$23 per barrel to cover their cash costs and another US$6 per barrel to cover sustaining capital.

“At sustained prices below this level, we expect some Canadian production, such as heavy oil, to be shut-in,” he wrote, but cautioned that oilsands companies are generally hesitant to shut in steambased operations over fears they could permanentl­y damage their reservoirs.

Financial Post

This will only impact our salaried employees with reductions in the range of 0 to 10 per cent and more of the impact will be on higher salaried individual­s.

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