Caution still rules as oil price climbs
Springtime has arrived in Calgary early. So has a sudden lift in crude oil prices.
But if there’s one early message to take from Canadian energy companies that have already released their first-quarter results, it’s simple: Don’t believe the hope. At least, not yet. At Tuesday’s annual meeting of Husky Energy, chief executive Asim Ghosh made a point of stressing he wasn’t about to bank on the short-term uptick in crude oil prices this spring becoming permanent.
West Texas Intermediate oil climbed $1.40 Tuesday to US$44.04 a barrel, up about twothirds since plunging below $27 in mid-February.
Like many producers, Husky has gone through a painful period of shedding staff and suspending its dividend due to slumping commodity prices. But the integrated oil company hasn’t yet seen enough hard evidence of improving prices to alter its plans for 2016.
“We have already seen several false springs,” Ghosh told shareholders.
“One can make the case for near-term price recovery and tailor one’s business plan accordingly. Or, one could create an equally plausible case that sees prices remaining low for several years,” he explained.
“If you bet … on a near-term recovery and get that call wrong, the consequences could be severe, to say the least, for the company.”
That sentiment seems to prevail among many industry players.
Everyone is watching oil and gas prices closely, hoping the bottom is behind the sector. But few are going to start spending more money after all of the damage inflicted on balance sheets during the past 18 months.
Husky, which announced a firstquarter loss of $458 million on Monday along with the $1.7-billion sale of some midstream assets, will not be making such a bet, Ghosh said.
The company will continue to make its plans based on WTI crude at US$30 a barrel, and the Canadian dollar at 70 cents — both well below today’s prices. Such caution is well-earned. Much of the sector has been mired in a financial swamp of rising debt levels, falling share prices and shrinking cash-flow levels.
Capital spending by companies will plunge to $31 billion this year, according to the Canadian Association of Petroleum Producers.
That’s down from $48 billion spent by the sector last year and $81 billion in 2014.
Husky, with assets both in Canada and abroad, has followed the trend, cutting capital spending from $5 billion in 2014 to $3 billion last year, while shedding 1,400 positions last fall and more jobs in February.
(Ghosh said Tuesday the company is done with efforts to rightsize the organization).
In 2016, Husky’s capital spending has been lowered to between $2.1 billion and $2.3 billion. Asked if he might open the spending taps, Ghosh quickly ruled it out, noting the volatility in the oil markets. “We are clearly into a new world where there isn’t a decider of the price. There are a lot of influencers,” he later told reporters. “At this point, we still are not in a supply-demand balance.”
If oil companies remain leery, the service sector has been squeezed even harder as producers have trimmed costs.
At the country’s largest driller, there’s talk about preparing for an eventual upturn, although Precision Drilling Corp. CEO Kevin Neveu said Monday there’s no clear sign when that moment will arrive.
The company reported a firstquarter loss of $20 million during what is typically a busy winter drilling season. Rig utilization days dropped in the quarter by more than a third in Canada and 60 per cent in the United States compared with the same period in 2015.
“While there are no signs or early indicators of a rebound and the bottom may yet be elusive, we believe it’s critically important to be well-positioned ... when the rebound arrives,” Neveu said in a conference call. “As far as any kind of future improvement, we’ve seen no change in customer sentiment yet.”
There are some reasons for hope, however. FirstEnergy Capital analyst Martin King believes the oil price bottom was reached in February. Although prices remain uneven, he believes the current price range of $38 to $45 is “very reasonable right now.”
“The fundamentals have improved a lot more than some of the bearish sentiment out there,” King said in an interview. “I think the lows of February, we’re done with that.” FirstEnergy expects WTI oil to average US$40.35 for the year. King notes U.S. oil supply is steadily declining, capital spending cuts are starting to be felt and rig counts are falling.
The summer driving season with higher demand is just around the corner. Global inventories are also seeing a better balance but still need to drop off south of the border, he added.
That doesn’t mean prices are going to return to $80 a barrel, but King doesn’t think that’s necessary. A reasonable recovery between $40 to $60 a barrel over the next two years would be a proper start. After all the unpleasantness of the lower-for-longer downturn, an early spring is a welcome thing on oil markets.
“The worst is behind us is the key point here,” King said. “It’s going to be a bumpy, but gradual improvement.”