Oilpatch outlook remains bleak

Layoffs, dividend cuts on the way

The oilpatch is bracing for more layoffs, dividend reductions and capex cuts as companies reveal the full impact of a 14-month decline in crude oil prices on their fourth quarter earnings.

Cenovus Energy Inc. said Thursday the “hurricane force” impacting the industry has compelled the oilsands producer to cut its dividend and plan more layoffs this year, while oil services provider Precision Drilling Corp. said it’s suspending its dividend as the company suffered a $271 million net loss in the fourth quarter.

Cenovus CEO Brian Ferguson said 2015 was a watershed year for the company and for the industry.

“We had a stiff headwind in 2015, which in 2016 has gone to hurricane force. We are well prepared to withstand it," Ferguson told investors in a conference call.

Cenovus battened down the hatches, cutting its quarterly dividend by 69 per cent, after announcing a net loss of $641 million in the fourth quarter. Full-year profit declined to $618 million, a 17 per cent drop over 2014. The company has scaled back capital spending for 2016 to $1.25 billion, compared to $1.5 billion previously.

ARC Resources Ltd., a Calgarybased conventional producer, also cut its dividend, by 50 per cent, and reduced capital expenditure by 29 per cent to $390 million late Wednesday evening.

Precision Drilling CEO Kevin Neveu offered a dour outlook for the sector.

“There is limited visibility with few positive market signals,” he said. “In this protracted challenging environment, financial stability is paramount for both survival and sustaining competitive advantage."

Cenovus’s staff retrenchment and capital and operating cost cuts would ensure the company remains stable even if prices remain at their current level of under US$30 per barrel till the end of 2018, Ferguson said.

After cutting 15 per cent, or 1,500 staff, last year, the company said it was planning further layoffs. The company is also cutting cash compensation for Ferguson and four other top executives, as part of a larger drive to find $200 million in cost savings.

“My key message today is that we will not sacrifice our financial resilience. This is not a time for halfmeasures,” said Ferguson.

Cenovus’ conventional oil production declined by 12 per cent during the year, primarily as it capital spending, but also due to the sale of non-core assets and divestiture of its royalty and fee land business in 2015.

The company is looking to sell some conventional assets but core assets such as its refinery business are “not for sale,” Ferguson said.

With $4 billion in cash, Ferguson said in an interview it is looking at “opportunities” in its core areas, but declined to give details.

RBC Capital Markets said it was maintaining its outperform rating on Cenovus with a price target of $22 per share, compared to its current price of about $14.

Precision Drilling, which endured a $363 million loss for the year, said its drilling activity in its key markets of Canada and the United States declined 51 per cent and 55 per cent, respectively. However, the cost discipline of last year has allowed the company to raise its capital expenditures this year to $202 million, compared to its previous guidance of $180 million.

“We believe the need for a dividend cut in 1H16 had been well understood by institutional investors, given thorough disclosure at 3Q15,” Dan MacDonald, analyst at RBC Capital Markets, said in a note to clients. “PD remains one of our favourite ways to position for a recovery.”

The analyst has a price target of $7.50 for the Precision Drilling, about double its current price.