Canadian oil firms fight back
The sector’s biggest companies staunched some of their losses across the second quarter, but the results still made for depressing reading
The Canadian oil patch performed much better than expected in the second quarter. Firms took swift and dramatic action in March and April to slash capital spending, and in many cases dividends, to protect their balance sheets.
Despite a massive collapse in revenue, combined losses for the country’s five largest oil and gas producers—Canadian Natural Resources (CNRL), Suncor Energy, Cenovus Energy, Imperial Oil and Husky Energy—were less than a quarter of what they were in the first three months of the year.
All five indicated plans to maintain capital spending discipline and low levels of drilling through to at least the end of this year, given continuing Covid-related market uncertainty, and despite the recent rebound in oil prices. In the case of CNRL at least, this allows them to again grow production by acquisition rather than the drill bit, as it announced plans in August to acquire Calgary-based Painted Pony Energy .
Financials, production and drilling
Revenues for Canada’s five largest oil and gas producers—which account for roughly 40pc of the country’s output—dropped by 57pc, to C$15.44bn (US$11.63bn), in the second quarter compared with the same period of 2019. Cenovus experienced the largest decline, of 61pc, whereas CNRL’s revenue was slashed by half (see Fig. 1).
“This acquisition further strengthens Canadian Natural’s natural gas assets and production base” McKay, CNRL
The combination of lower oil prices and production contributed to declining revenue for the firm, with Cenovus the sole exception. Total oil and gas output for the five declined by 7pc, to 2.88mn bl/d oe, in the second quarter. Suncor saw the most dramatic decline, dropping by 18pc year-on-year. In contrast, CNRL’s production slipped by a modest 1pc and Cenovus saw a 5pc gain.
CNRL and Cenovus quickly brought back large amounts of shut-in oil as WTI rebounded to over $40/bl during the second quarter. CNRL now has less than 10,000bl/d of oil production idled, according to company president Tim McKay, compared to as much as 120,000bl/d in May. Suncor was unable to respond as quickly to rising crude prices as it brought forward plant turnarounds when prices cratered due to the short-lived oil price war and Covid-related lockdowns.
The Canadian majors lost a combined C$2bn in the second quarter—compared with a profit of almost C$9bn in the second quarter of 2019—with losses fairly evenly distributed between them. Suncor had the largest loss, of C$610mn, and Cenovus the smallest, at C$240mn.
The spending discipline contributing to these relatively small company losses led trade association the Petroleum Services Association of Canada (PSAC) to trim its wells-to-be-drilled forecast in the country yet again at the end of July. As of now, PSAC is forecasting a mere 2,800 wells for 2020, 10pc less than its previous forecast and the lowest number in almost 50 years.
Painted Pony will be the latest in a long line of Western Canadian oil and gas companies and assets acquired at bargain basement prices by CNRL. The largest oil and gas producer in Canada agreed to buy the smaller firm, one of the most promising natural gas players in the massive Montney formation, for about C$461mn including debt. The company currently produces 270mn ft³/d (7.65mn m³/d) of gas and 4,600bl/d of natural gas liquids (NGLs).
57pc – Revenue loss for Canada’s biggest firms in Q2
CNRL agreed to pay 69 cents a share, 17pc above its market closing price on 7 August but far below its record high of C$14 a share in 2014. Painted Pony has been hindered in recent years by low regional gas prices and high debt levels, and, since March, by low NGL prices.
“This acquisition further strengthens Canadian Natural’s natural gas assets and production base in key operating areas and complements the company’s diversified portfolio,” says McKay. “This transaction also allows us to further insulate against natural gas costs in our oil sands operations.”