As clouds part over oilpatch, firms hedge bets on oil price
Companies remain hesitant to declare end of austerity even as oil prices head upward
The rebound in oil prices has started to fade fears of the “lower for longer” forecast following a crushing economic slump. But few energy firms are ready to turn on the spending taps just yet, taking a cautious approach with the potential for “some choppy waters” still ahead.
After oil prices fell into a deep downward spiral three years ago, the words “lower for longer” became a mantra across Canada’s energy sector.
It signalled a sharp change in how the industry operated, with fewer jobs, smaller budgets, a drive to cut costs and improve efficiency.
It prepared companies for a prolonged period of retrenchment, as the industry hunkered down to ride out the worst oilprice bust in a generation.
Earlier this week, as benchmark North American oil prices hovered around US$64 a barrel, analyst Martin King of GMP FirstEnergy said the situation has begun to turn.
Strong growth in global oil demand and declining inventory levels are starting to flip the script.
Oil prices are up nearly 30 per cent since early October, closing Wednesday at US$63.97 a barrel for West Texas Intermediate (WTI) crude.
The Organization of Petroleum Exporting Countries has largely lived up to its agreement to curtail production. The cartel extended the pact until the end of the year, although a review is coming in June.
“Certainly, the price skeptics have been silenced, at least for a while,” King told the crowd at the Calgary Petroleum Club.
“The mantra of lower for longer seems to be fading.” Fading, yes. The mentality hasn’t completely disappeared, however, with the recent blowout in lightheavy oil price differentials and the profound problems battering Canadian natural gas producers.
Companies are welcoming higher oil prices, but cautious about betting heavily on them.
“I get paid to make sure we are successful regardless of what happens with the commodity price,” said Enerplus Corp. CEO Ian Dundas.
“We are planning for lower commodity prices, we’re planning for volatility and it’s one of the reasons … we’re being disciplined in our spending.”
King titled his speech “split personality,” underscoring the divergence between oil and natural gas fortunes, as well as commodity prices in the United States and Canada.
For example, GMP FirstEnergy has increased its oil price forecast this year to US$58 a barrel for West Texas Intermediate crude, but lowered its projected natural gas prices at the AECO hub to $2.21 per thousand cubic feet, down more than a buck from earlier projections.
While U.S. producers enjoy the benefits of the oil price rally, the response in Canada has been more subdued.
An outage on the Keystone pipeline network in November helped spark the biggest price spread between WTI and Western Canadian Select, the domestic heavy crude benchmark, since 2014, although it’s eased a bit in recent days.
Aside from infrastructure constraints, oilsands production continues to increase. Pipelines are running in excess of 90 per cent full, pushing more barrels on to rail.
Total rail capacity in Alberta sits at 672,000 barrels a day “and I could easily see at least half of that used to pick up the supply increases that are coming,” King added.
While rail is a short-term fix, it’s not a long-term solution for the industry or the country.
It costs an extra $8 to $12 per barrel for producers to ship oil by rail, leaving money on the table for companies, the province and the federal government.
Oil prices have been headed upward since the fall, but the future appears downright gloomy for Alberta natural gas prices.
Alberta gas storage is at record highs, some companies are challenged getting product to market and there’s been a huge increase in North American supplies. Within just a couple of months, Western Canadian gas production recently surged by 10 per cent.
A number of gas-focused companies have already announced plans to defer capital spending, and more gas is expected to be shut in.
For Canadian petroleum producers, it all makes for a complicated start to 2018.
Companies are leery about declaring the end of the austerity and abandoning the lower-forlonger attitude.
Brian Schmidt, CEO of Tamarack Valley Energy Ltd., said it’s difficult for the industry to budget for higher crude prices when OPEC could decide to reverse directions and bring more oil to market.
He believes the current price optimism is “a bit overdone,” particularly with Canadian players facing a rising loonie, the impact of wider differentials and Alberta gas prices taking a beating.
Tamarack announced this week it will spend between $195 million and $205 million on its capital program this year, making a conscious decision to shift money to projects that are more oil focused.
Crude prices are strengthening, but Schmidt cautions there could still be “some choppy waters” ahead.
“You have to just be really, really disciplined about your cost structure and control internally what you can control ... and then let the price do what it will,” he said.
At Enerplus, the company plans to increase its capital spending about 20 per cent this year to around $560 million.
Dundas noted about 85 per cent of the capital program will target oil opportunities, with the bulk going to its North Dakota properties.
The lesson from the downturn is to plan for modest prices and, if they move higher, be well positioned to capitalize on the upside, he added.
“If oil is $50, things work really well for us,” Dundas said.
“We have come through this crisis with strength because we’ve been focused on that (careful approach) and we continue to focus on cost control and disciplined spending.
“I don’t think we’ll be alone in that.”
The mindset of lower for longer will continue to fade as global oil prices keep climbing higher.
But the hard lessons learned from those that have weathered the storm — and reshaped their companies — will continue throughout 2018.