Caution is king as oilpatch budget season begins
Executive teams at Calgary’s oil and gas producers are these days busy crunching the numbers — and the reworked and re-worked-again numbers — from their finance, operations and strategic planning people to develop their 2013 spending plans.
The stakes are high in these discussions, with capital expenditures in Canada’s oil and gas sector expected to exceed $55 billion in 2012.
The shifting fortunes in commodity prices means the dynamic within the budgeting process has reversed from recent years. Analysts now see that most of the downside risk on pricing is linked to crude oil and much of the upside potential looks tied to natural gas.
Since about 60 per cent of the oil and gas spending in Canada is outside the oilsands, the shifts in oil and gas prices can prompt significant strategy changes for producers in areas from acquisitions and divestitures to price hedging and field operations for conventional operations.
Nobody’s forecasting a revival in gas spending after the painfully uneconomic prices of recent years, but there’s a sense the worst is over.
“The three words I’d use are producers are receptive but cautious,” said Martin King, vice-president of institutional research at FirstEnergy Capital, after presenting his outlook for the year ahead to a roomful of oil and gas executives this week at The Petroleum Club.
Natural gas in Alberta sunk close to $1.50 per thousand cubic feet this spring but has recently rebounded to the $2.25 to $2.50 range. U.S. prices have been well over $3. The Alberta price has averaged $2.14 to date in 2012 compared to $3.63 last year and $3.99 in 2010.
“Producers are saying ‘We like the idea that prices are up — maybe it will last and maybe it won’t.’ I don’t think they’re ready to jump on the spending bandwagon just yet.
“There was a lot of blood on the floor in the first half of the year on the gas side,” King said.
The oil story is reversed. There’s a sense the best may be over.
Benchmark West Texas Intermediate crude has retreated from the $100 threshold but the price was still robust at $92.60 per barrel in the third quarter. The concern is the economic situation in Europe and the U.S. and the potential for a major slowdown in China will dampen global oil demand. The Saudis could also bolster their production to drive prices down and shut down some higher cost production.
Oil giant Chevron has already signalled its thirdquarter earnings will be “substantially lower” than in the second quarter due to production declines and lower oil prices.
The oil price Chevron realized in the U.S. was $95.44 in July and August compared with $103.91 in the April-June quarter.
Historically wide differentials for Canadian oil — the discount is above $20 a barrel to date in 2012 — has also dampened the enthusiasm around oil.
The top Canadian producers will begin reporting third quarter results later this month. The 2013 capital budget announcements will start to be released in November and there’s a sense companies are taking a cautious approach to spending.
Suncor Energy has already said it’s rethinking billions in planned oilsands spending due to rising costs.
The result is most producers in Western Canada are developing “tightly controlled budgets around an oil strategy,” said Stephen Calderwood, vice-president of investment banking at Salman Partners in Calgary.
“Large companies are not going to change their budgets, even if we do see $6 gas this winter and the reason is they see any kind of rally over $4 as very short-lived,” he said.
King noted U.S. gas production stagnated in the past year and there’s been a significant decline in Canada. A slowdown in drilling should only worsen the supply situation in 2013. The caveat with gas consumption and pricing is weather. While most forecasts call for a mild winter in North America it’s never a sure bet.
The low prices have seen significant fuel switching from coal to gas for power plants in the U.S. Most of the demand increase is long term but King said if gas prices sustain close to $4 it could trigger some returns to coal-fired generation.
FirstEnergy forecasts WTI will average $97.50 next year and be above $100 in the two years after that as differentials tighten with additional transportation. It predicts Alberta gas will be $3.51 in 2013 and above $4 in the two years after that.
The title of King’s presentation was Crude Oil and Natural Gas Markets: Cautious Bear and Raging Bull. That may well signal the current sentiment on pricing but there was a sense most in his audience want to see those prices sustained before they will be anything but cautious. STEPHEN EWART IS A CALGARY HERALD COLUMNIST SEWART@CALGARYHERALD.COM