Crude pro­duc­tion cuts will cre­ate win­ners and losers: an­a­lysts

Shares in Cen­ovus and Cana­dian Nat­u­ral Re­sources soared af­ter crude pro­duc­tion cuts

Fort McMurray Today - - LOCAL NEWS - DAN HEAL­ING

Oil pro­duc­tion cuts an­nounced by the Al­berta gov­ern­ment will have the de­sired out­come of re­duc­ing steep dis­counts on its oil, but it will also cre­ate win­ners and losers, fi­nan­cial an­a­lysts say.

Shares in the com­pa­nies most likely to ben­e­fit from the move to cur­tail crude pro­duc­tion from larger pro­duc­ers start­ing Jan. 1 soared Mon­day as the price dif­fer­en­tial for heavy oil­sands bi­tu­men-blend fell.

Mean­while, shares in oil pro­duc­ers who had been ei­ther ben­e­fit­ing or in­su­lated from the dis­count prices stayed put or sub­sided.

“There are go­ing to be a num­ber of pro­duc­ers who will shoul­der the brunt of the Al­berta gov­ern­ment’s 325,000 bar­rels per day in man­dated pro­duc­tion cur­tail­ments of raw crude and bi­tu­men (namely the oil­sands pro­duc­ers), but the broader health of the province is likely to ben­e­fit over the medium term from the de­ci­sion as a re­sult of nar­row­ing dif­fer­en­tials and stronger roy­alty rev­enue,” said a re­port from Cal­gary-based Al­ta­corp Cap­i­tal.

Al­berta Premier Rachel Not­ley an­nounced Sun­day the province will re­quire pro­duc­ers with more than 10,000 bar­rels per day of out­put to cut pro­duc­tion by about 8.7 per cent un­til there is enough ship­ping space on pipe­lines to im­prove prices, ex­pected to take three months.

Af­ter that, the re­duc­tion will be low­ered to 95,000 bpd through the rest of 2019.

In early trad­ing Mon­day, Cen­ovus En­ergy Inc. rose as much as 13 per cent over its Fri­day close to $11.11, while Cana­dian Nat­u­ral Re­sources Ltd. rose as much as 16 per cent to $38.74.

Cen­ovus CEO Alex Pour­baix was the first oil­sands CEO to call for the province to cur­tail pro­duc­tion. On Sun­day both Cen­ovus and Cana­dian Nat­u­ral is­sued state­ments of sup­port for the Al­berta move, as did Chi­nese-owned oil­sands pro­ducer CNOOC-NEXEN.

Canada’s largest oil and gas com­pany, Sun­cor En­ergy Inc., said Mon­day its es­ti­mate of the im­pact of the pro­vin­cial cuts will be pro­vided when it is­sues its 2019 cap­i­tal and pro­duc­tion guid­ance.

“Sun­cor be­lieves the mar­ket is the most ef­fec­tive means to bal­ance sup­ply and de­mand and nor­mal­ize dif­fer­en­tials,” it said. It has said it is in­su­lated from price dis­counts be­cause of its Cana­dian re­finer­ies and pipe­line con­tracts.

In mid-day trad­ing, Sun­cor was down 1.5 per cent while fel­low Cal­gary-based com­pa­nies that both pro­duce and re­fine oil, Im­pe­rial Oil Ltd. and Husky En­ergy Inc., were off 4.1 per cent and 0.8 per cent, re­spec­tively.

The win­ners from the cur­tail­ments will in­clude the pro­vin­cial gov­ern­ment (which es­ti­mates it will earn $1.1 bil­lion more from roy­al­ties in the 2019-20 fis­cal year); en­ergy pro­duc­ers in B.C. and Saskatchewan, who will ben­e­fit from bet­ter prices with­out hav­ing to cut pro­duc­tion; con­den­sate pro­duc­ers, as that light oil isn’t in­cluded in the cur­tail­ment; and ju­nior en­ergy pro­duc­ers who are ex­empt from the pro­gram, Al­ta­corp said in its re­port.

The losers in­clude in­te­grated pro­duc­ers who will likely pay more for their re­fin­ing feed­stock and com­pa­nies that had in­tended to grow their pro­duc­tion in the first half of 2019, it said.

Of the 378 op­er­a­tors with ac­tive oil pro­duc­tion in Al­berta in Oc­to­ber, only 25 pro­duce more than 10,000 bpd, Al­ta­corp noted.

Oil­field ser­vice com­pa­nies are also on the los­ing side of the equa­tion, said GMP Firsten­ergy in a note, be­cause drilling bud­gets will likely shrink in early 2019.

Com­pa­nies that pre­vi­ously re­duced out­put vol­un­tar­ily will re­ceive credit un­der the Al­berta plan.

An­a­lysts said that means the mar­ket is al­ready half­way to the pro­vin­cial goal as es­ti­mates sug­gest about 150,000 bpd has al­ready been shut in, mainly by Cen­ovus and Cana­dian Nat­u­ral.

“Anec­do­tally, this will likely be a messy process with col­lat­eral dam­age (reser­voir man­age­ment, aban­don­ments, takeor-pay over­hang),” said a re­port from Na­tional Bank of Canada an­a­lysts.

The dis­count be­tween West­ern Cana­dian Se­lect bi­tu­men­blend oil and New York-traded West Texas In­ter­me­di­ate was about US$21 per bar­rel on Mon­day morn­ing, an im­prove­ment of about US$7 per bar­rel from Fri­day, ac­cord­ing to Net En­ergy. WTI was up al­most US$2 per bar­rel.

“We es­ti­mate oil prices need to av­er­age only US$2.50 per bar­rel higher to off­set the cash flow im­pact of the man­dated pro­duc­tion cut,” said se­nior an­a­lyst Jen­nifer Row­land of Ed­ward Jones Eq­uity Re­search in a note.

The cuts will hit the larger Cana­dian econ­omy, ac­cord­ing to BMO Cap­i­tal Mar­kets, which es­ti­mates gross do­mes­tic prod­uct will drop by more than two per cent on an an­nu­al­ized ba­sis in the first quar­ter of 2019.

“The ex­pected re­bound in pro­duc­tion later in the year should con­tain the full-year 2019 GDP im­pact and po­ten­tially lift 2020 slightly, de­pend­ing on tim­ing,” it added, ad­just­ing its na­tional growth fore­cast for 2019 to 1.8 per cent from 2.0 per cent.

RYAN JACK­SON/POST­MEDIA NET­WORK

Giant nat­u­ral gas fu­elled steam gen­er­a­tors at the Cen­ovus SAGD oil­sands fa­cil­ity near Con­klin, Alta., 120 kilo­me­tres south of Fort Mcmur­ray, Alta. on Au­gust 28, 2013.

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