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'Death by a thousand cuts' in the oil patch

suncor
Tags: Oil
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Recent spending cuts by some of the oil sands’ biggest players is likely just a taste of what's to come, according to analysts at CIBC.

"Pricing risk, pipeline risk and inflation risk may all soon collaborate to prompt some more marginal or high capex projects to begin delaying planned spending," analyst Andrew Potter said in a 97-page report to clients.

Potter says that instead of massive cuts, the energy companies will instead pursue a policy of “death by a thousand cuts."

Potter says there is already evidence that the oil patch is beginning to buckle down on spending.

In August, Canadian Natural Resources announced that it would cut its 2012 capital spending by $680 million, or about 10 percent. Much of that cut is related to its Horizon oil sands expansion.

In July, Suncor said it was applying "rigorous scrutiny" to three of its largest projects -- Fort Hills, Joselyn and Voyageur -- adding that the company is not interested in growing for growth's sake.

"Ironically, a cancellation or deferral of one or more parts of Suncor’s mining-related growth would likely be viewed by the market as a positive," Potter says. "The disconnect of canceling growth potentially leading to higher share prices arises from the view by many investors (right or wrong) that mining projects and upgraders offer very little returns and investors would prefer to see higher free cash flows (FCFs) returned to shareholders."

Potter also says that the major spread that developed between the price of Canadian crude and U.S. crude will likely continue through the year on "highly volatile prices."

"We believe that the recent narrowing of Canadian crude prices is largely driven by meaningful supply coming off the market in Canada in September," he says.

The spread between the price of Canadian oil and U.S. oil has been a hot topic in recent months. Many commentators believe that the controversial Northern Gateway pipeline, which would ship oil from Alberta to a port on the coast of British Columbia, would narrow that spread by offering Canadian producers another market for their products.

The president of Enbridge recently told BNN that by selling Canadian crude for a discount in U.S. markets, Canadian producers were leaving as much as $60 million a day of value on the table.

The most common benchmark for Canadian crude is called Western Canadian Select (WCS), which was at one point in 2012 selling for as much as a 37-percent discount to West Texas Intermediate (WTI), the U.S. benchmark for crude. Potter says WCS typically trades at about a 20-percent discount to WTI.

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