Plenty of strength in weakened oilsands
Sentiment among oilsands companies has soured over the past year as economic, political and environmental issues have aligned to cripple the Alberta oilpatch, but there is still considerable value in the sector, say analysts.
Stunned by a precipitous drop in oil prices, Alberta’s oil industry saw the ground shift under its feet with the election of the NDP government, which has pledged to wring more revenues from the sector. Meanwhile, a rising global consensus on cutting carbon emissions — with no less than a papal endorsement — has left the oilsands jittery as pressure mounts to cut emissions.
Not surprisingly, Alberta’s economy is reeling. The number of Albertans collecting employment insurance rose 10.7 per cent in April, compared to national average growth of 0.5 per cent, Statistics Canada said Thursday. It was the fourth month in a row that Alberta had the biggest increase in EI. The province’s unemployment rate hit 5.8 per cent in May, the highest rate seen since January 2011.
Despite these challenges, the oilsands remain strong, says RBC Dominion Securities Inc. in a new report.
Capital investments will decline 32 per cent this year to just under $18 billion, but a number of high-probability projects gives RBC analyst Mark Friesen “the confidence that capital spending will remain robust throughout the rest of this decade.”
Growth will be concentrated in the 10 most active oilsands producers, such as Suncor, Canadian Natural Resources and Imperial Oil that are spearheading projects that will boost production by an additional 1.4 million barrels per day — higher than Algeria or the U.K.’s total crude oil production.
The increase would come even after companies reduce capital expenditure by $45 billion during the next five years, and projects with a combined capacity of 175,000 bpd will not see the light of day, RBC estimates.
While the sector faces a multitude of challenges, such as pipeline capacity constraints and increased environmental objection, “we still believe that financing conviction remains the greatest near-term challenge facing the sector, particularly for the smaller oilsands development companies at this time of low-cycle oil pricing,” Friesen said.
A number of oil and gas companies have beefed up their finances with a string of bought deals to weather a 40-per-cent drop in oil prices during the past 12 months.
While the industry has some control over costs and can pull financial levers to get through the tough period, it is feeling helpless against political uncertainty in Alberta.
CNRL CEO Steve Laut issued a veiled threat to the new NDP government during an investor call Wednesday.
“We look forward to working together with the government during this period of review. That being said, we have significant capital flexibility and we will allocate capital to manage any changes that may be forthcoming,” Laut said.
Cenovus is also warning that capital is mobile and investors are averse to instability. “That’s why it’s critical that Alberta remain fiscally competitive to keep investment and jobs from flowing out of the province to other jurisdictions,” Brett Harris, spokesperson at Cenovus, said in an email. “This is particularly true at a time when one of Alberta’s most important industries is grappling with a plunge in commodity prices that has resulted in reduced spending and investment and workforce reductions.”
Investment bank Peters & Co. believes the potential changes in royalties, carbon costs and cash taxability will weigh most heavily on large oilsands companies.
Interestingly, the relentless drive to cuts costs and slash capital expenditure has left the major oilsands companies on more solid fiscal ground.
“The forecast financial positions for all of the companies have improved materially since January,” Peters & Co. said in a recent report. “The companies which we believe will continue to show meaningful growth on both a production and cash flow basis as Cenovus ... Imperial and Suncor.”
That may explain why investors are not dumping oilsands shares in droves. The S&P TSX Capped Energy Index is down a relatively modest 4.5 per cent year-todate, compared to nearly flat growth in the main composite index.
The moderately positive news is outweighed by a realization that many new greenfield projects are tough to justify. “In the current commodity price environment, it is difficult to argue that potential new oilsands projects will generate sufficient returns required to be sanctioned,” Peters & Co. said.
The oilsands can take comfort from the fact that its longterm production profile would ensure Alberta remains on the radar screens of companies.
“Longer-term reserve bookings of scale will be crucial for the majors, and this is a problem that the oilsands solves,” Peters & Co. said.