Oilpatch shows signs of resilience
This week has delivered a surfeit of third-quarter oilpatch earnings and accompanying conference calls — each adding to a growing sense that investing in the energy sector is no longer a game of catch a falling knife.
Rather than rolling over, companies have sought out — and found — new investment opportunities and efficient ways to cut costs while increasing shareholder value.
Canadian Natural Resources Ltd. on Thursday announced a dividend increase to $1 per share. Yes, you read that right.
Enbridge reported third-quarter adjusted profit of $437 million. TransCanada successfully tapped the equity markets again to raise $3.2 billion, bringing its total amount achieved this year to $7.6 billion.
Encana surpassed analyst expectations while Seven Generations blew the doors off with its results.
To paraphrase Monty Python, the industry is not dead yet.
“The free cash flow power of these (oilsands) assets at low oil prices is way beyond what anyone would have been modelling two years ago,” said Mike Dunn, director of institutional research at GMP FirstEnergy.
It’s not like anyone has a benchmark for this.
The last protracted oil price slump, 16 years ago, was long before the oilsands had started making money — they weren’t officially classified as reserves until 2003 — or approached current production of 2.5 million barrels a day.
If two key factors have characterized the current earnings season, it’s the success companies have seen in increasing operating reliability and decreasing costs.
A common theme in recent news releases is companies announcing they have decreased per unit costs by anywhere from 20 to 35 per cent.
Even more interesting is that numbers being crunched around town show expenses that were squeezing margins when oil was trading north of $100/bbl have generally been cut in half.
Where Canadian Natural raised a few eyebrows — beyond the announced dividend increase — was its decision to boost 2016 capital spending to $4.4 billion, restart its Kirby North project and grow the number of drilling rigs from five to 16 by January.
It’s also resuming activity in the North Sea, where tax rates have dropped from 20 per cent to 10 per cent.
While it’s not the kind of massive investment in capital projects that characterized the oilpatch a decade ago — CNRL expects to spend only $28 million at Kirby North next year — it’s an abrupt turn from March when the company announced a $1-billion cut in capital expenditures.
The fact CNRL is able to put Kirby North back in active mode relatively quickly is a nod to its 2015 decision to reduce salaries rather than lay off employees.
That means institutional knowledge of the project remains intact.
As its completes expansion projects — Horizon 3B next year will add another 80,000 barrels a day of production — Dunn is forecasting the company, at current forward strip prices of US$54 per barrel, will generate free cash flow of $1.5 billion by 2018.
That means dollars to strengthen the balance sheet, which company president Steve Laut said was a priority, buy back shares, boost capital expenditures or make acquisitions.
If oil prices strengthen, the numbers look even better.
While no one is printing money in the oilpatch these days, the fact the bleeding has slowed — or, in the case of Suncor, stopped — is contributing to what can be defined as measured optimism.
Phrases along the lines of “we have bottomed” or “the worst is over,” as ATB Financial declared this week, are being heard with greater frequency.
The fact TransCanada raised another $3.2 billion in the equity markets suggests money is there for the good names, stories and management teams.
One finance type remarked recently that the street was getting ready for a ‘cavalcade’ of initial public offerings by private companies and anecdotes are flying that more private equity players are interested in investing in Canada’s oilpatch.
What’s becoming clear as the numbers roll out is the sector is doing what it needs to — remaining viable and competitive by increasing efficiencies and decreasing costs.
It also remains committed to initiatives focused on decreasing the environmental impact of the oilsands segment of the industry through associations such as the Canadian Oil Sands Innovation Alliance.
But it can’t do it all without some help.
Policy certainty is needed from the federal and provincial governments, on everything from emissions caps to carbon taxes.
It was heard more than once at a recent Fraser Institute event honouring Saskatchewan Premier Brad Wall that his province is far more efficient in assessing and processing development permits.
It also means politicians realizing it’s time to spend some political capital to make access to tidewater a reality.
The one way street of policy initiatives such as the Climate Leadership Plan that puts a huge onus on industry has to stop.
There must be a quid pro quo that provides the ability to sell what’s produced in Alberta on world markets so the next time there’s a downturn in oil prices the red ink won’t be as plentiful, nor the impact as profound.