Canadian oil firms battle for survival
Profits plunged during the first quarter for a sector already struggling to contend with growing debt and a shortage of midstream takeaway
Major Canadian oil companies saw a sea of red in the first quarter. They have now taken action to conserve cash and, hopefully, improve their balance sheets in anticipation of even harsher conditions in the second quarter due to the short-lived oil price war and global efforts to combat Covid-19.
Combined, four major Canadian oil companies—Suncor Energy, Canadian Natural Resources (CNRL), Cenovus Energy and Husky Energy—saw a massive C$8.32bn (US$5.9bn) loss in the first quarter of this year compared with a C$2.87bn profit in the first quarter of 2019 (see Table 1). Even more disheartening, all four companies suffered operating losses in the past quarter after accounting for special charges, with operating losses greater than C$1bn for both CNRL and Cenovus.
In an attempt to conserve cash, the four companies have cut capital spending budgets for 2020 by an average of 38pc, to a total of just under C$9bn, and are shutting in relatively high-cost oil production this quarter. Suncor, Cenovus and Husky have also slashed their quarterly corporate dividends.
The firms start at a disadvantage to their peers elsewhere in the world, having suffered from below-global prices for their oil for much of the period since the 2014-16 oil price war—given a lack of crude pipeline capacity exiting Western Canada—and, in most cases, having added debt by purchasing assets from foreign companies exiting the region.
Cenovus has taken possibly the most drastic measures to reduce costs, having slashed its capital spending budget by 43pc
Based on figures from market data provider Refinitiv, the four Canadian companies have a debt-to-equity ratio of on average 48.5pc compared with an average of 28.3pc for their US counterparts ConocoPhillips, Chevron and ExxonMobil.
“The balance sheets of some very good [Canadian oil] companies are not as strong as they should be,” says Tim McMillan, president of the Canadian Association of Petroleum Producers (CAPP).
Suncor booked a loss of C$3.53bn in the first quarter compared with a profit of C$1.47bn in the same period last year, but most of the loss was the result of special charges. To conserve cash, the company has cut capital spending by a third, to C$3.80bn, and reduced its quarterly dividend by 55pc—its first ever dividend cut.
In addition, Suncor is planning to reduce upstream production by 10-15pc in the second quarter relative to first-quarter levels. These actions should reduce the company’s WTI breakeven from $45/bl to $35/bl.
CNRL lost C$1.28bn in the first quarter compared with a $960mn profit in the same period of 2019. This was despite achieving record quarterly production of almost 1.2mn bl/d oe—of which 939,000bl/d was liquids, the maximum allowed under Alberta’s ongoing crude curtailment programme.
US$5.9bn – Q1 losses from Canada’s four largest firms
To cut costs, the company has reduced capital spending by just over a third, to C$2.68bn, and is planning to shut in 76,000bl/d of relatively high cost oil production in May. CNRL’s WTI breakeven price was between $30/bl and $31/bl before these recent actions.
Cenovus reported a C$1.80bn loss in the first quarter of this year compared with a C$110mn profit in the first quarter of last year. The company has taken possibly the most drastic measures to reduce costs, having slashed its capital spending budget by 43pc, to a mere C$800mn, and suspended its corporate dividend outright. Cenovus needed WTI to be around $45/bl to maintain its dividend, with its breakeven price now around $38/bl. The company has recently shut in roughly 60,000bl/d of oil production.
Finally, Husky reported a loss of C$1.71bn in the first quarter compared with a profit of C$330mn in the same period of 2019, with roughly two-thirds of the loss due to special charges. To reduce costs, the company has cut capital spending by nearly half, to C$1.7bn, and slashed its quarterly divided by 90pc. In addition, Husky has shut in more than 80,000bl/d of relatively high-cost production since the end of March. Husky CEO Rob Peabody said his firm needs Brent oil prices in the mid-$30s to break even on oil production—subtract $5/bl for the WTI equivalent—during the company’s earnings call on 29 April.