TORONTO / WINNIPEG, Manitoba (Reuters) – Canada’s oil patch has experienced five years of existential threats that have slashed weaker companies, but now its strongest companies are trying to navigate the coronavirus pandemic, which has triggered the worst crisis in the oil industry in 40 year.
FILE PHOTOS: The Western Canadian canola field surrounding the oil pump jack looks in full bloom before being harvested late this summer in rural Alberta, Canada, July 23, 2019. REUTERS / Todd Korol / Photo File
Economic closure has stalled road trips, cutting fuel demand by around 30% worldwide. With consumption falling, oil producers around the world are cutting production sharply.
Canada, the fourth largest oil producer, has closed at 644,000 barrels per day, according to Eight Capital, among the highest in the world and 13% of February production. The largest companies in the country face weak demand while managing high levels of debt, forcing them to cut spending to levels not seen since the beginning of the oil sands boom 15 years ago.
All three, together with Canadian Natural Resources Ltd (CNQ.TO), sports an average percentage of debt to total equity of 48.5%, compared to 28.3% for US majors ConocoPhillips Co. (COP.N), Chevron Corp (CVX.N) and Exxon Mobil Corp (XOM.N), according to Refinitiv data.
“The balance sheets of some very good companies aren’t as strong as they should be,” said Tim McMillan, president of the Canadian Petroleum Producers Association.
The industry has reduced spending by $ 7 billion and investment in oil sands is seen reaching its lowest point in 15 years, according to consultant IHS Markit. Spending has fallen from more than $ 30 billion in 2014 to under $ 10 billion last year.
That might not be enough. Oil sands companies need to focus on shaving operational costs due to price cuts for Canadian heavy oil and higher operating costs to produce steam and trucks and running equipment to extract crude oil, said April Read, senior upstream analyst at consultancy Wood Mackenzie.
Canadian Natural, Canada’s largest oil and gas producer, said they need crude oil prices between US West Texas Intermediate (WTI) CLc1 from $ 30 to $ 31 per barrel to cover their ongoing costs and dividends, which are maintained even when posting quarterly losses of C $ 1.3 billion.
US crude closed at $ 24.74 a barrel on Friday. A barrel of Western Canada Select (WCS) sells for around $ 21.
Canadian Natural has $ 1.9 billion in debt that is due this year, but executives say the bank continues to support and estimates that there are no problems financing dividends. It has cut around 120,000 barrels per day of production for May and could extend the restriction to June if prices remain low, President Tim McKay told Reuters.
“We only have to cross the bridge when we get there,” he said.
Debt-laden Cenovus, the top four Canadian oil producers, canceled its dividends entirely because first-quarter losses swelled to C $ 1.8 billion. Chief Executive Alex Pourbaix said last week that the company is in a “strong financial position,” after paying C $ 2 billion since last year.
However, Cenovus may be forced to issue more shares, diluting investments from current holders, said Jason Mann, chief investment officer at EdgeHill, who sold Cenovus shares in February.
“They just got a depressed balance sheet,” he said. “Too much debt, not enough cash flow.”
Suncor, Canada’s number 2 oil and gas producer, cut its dividend for the first time on Tuesday as it reported a first-quarter loss of $ 3.53 billion.
PIPELINES FEELS TOO HEAT
Unlike the United States, the Canadian oil industry has been criticized since the 2014 accident, because any recovery was stopped by a blocked pipeline. Now, finally, the lines have room, because of the collapse of demand.
Canadian Plumbing Operator Enbridge Inc. (ENB.TO) posted a quarterly loss of C $ 1.4 billion. The company, which is used to allocating space on its Mainline system, now has spare capacity.
Maybe it should review plans to overhaul Mainline requirements as producers delay expansion, said Ryan Bushell, president at Newhaven Asset Management, which owns the shares.
“People will not want to do volume more than 20 years if they don’t know whether they will pass the next 20 days,” he said.
Canada does have several advantages.
This country’s heavy crude oil is very suitable for making asphalt for road construction. Rystad Energy Consultancy estimates U.S. requests for “other processed products” including asphalt will drop only 11% in the second quarter, compared to a 68% decrease for jet fuel and 24% for gasoline.
Storage hasn’t been filled as fast as in the United States, so production doesn’t tend to slow down more than needed.
Canada has also announced C $ 2.5 billion ($ 1.8 billion) as a step to help this industry. Banks are relaxing lending standards for energy companies to prevent a wave of bankruptcy – marking a different attitude from lenders in the United States.
However, Alberta’s unemployment rate could rise to 25% from the current 13.4%, said Prime Minister Jason Kenney. Oil and gas extraction workers make up 6% of jobs in Alberta, according to Statistics Canada, excluding refineries and petrochemical plants.
“This is perhaps the biggest existential crisis facing the Alberta oil industry,” said Mike Ashar, who led the Suncor oil and refining unit throughout the 1990s.
Reporting by Rod Nickel in Winnipeg, Manitoba and Jeff Lewis in Toronto; Editing by Marguerita Choy
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