Are you looking for a stock?
Try one of these
CALGARY — In the global game of chicken that has brought the oil and gas industry to its knees, Goldman Sachs is warning neither side may blink soon enough.
The oil market is “even more oversupplied than we had expected,” the influential Wall Street investment bank said in a report Friday. As a result, Goldman believes another dramatic decline in oil prices – possibly as low as US$20 per barrel for West Texas Intermediate – might be necessary in order to slow supply growth and spur enough demand to clear the glut.
The International Energy Agency believes such a supply drop could happen soon. The Paris-based agency forecast on Friday that production from outside the Organization of Petroleum Exporting Countries cartel will decline by the most since 1992 next year, falling by 500,000 barrels per day.
While the US$20-figure is not Goldman’s base case and is far from guaranteed (recall Goldman predicted WTI would hit US$200/barrel in the wake of the 2008 financial crisis), such a scenario playing out in reality would dramatically increase the suffering among Canada’s oil and gas sector. Here’s a look at which Canadian energy companies can survive, and which ones would succumb to a world of US$20 oil.
Costs are critical to surviving a price crash, so producers who spend the least to pull a barrel of oil (or an equivalent amount of natural gas) out of the ground will be best positioned to make it through a prolonged downturn. According to Moody’s, the lowest cost producer of liquid petroleum products in North America is Canada’s own Seven Generations Energy (VII.TO), which operates primarily in the Montney shale of northwestern Alberta. The company spends roughly $20 per barrel of oil equivalent (boe), meaning 7Gen would barely break even on its production if Goldman’s warning rings true.
Mining for bitumen in the oil sands of northern Alberta is among the most expensive ways on Earth to produce crude, but in the Fall 2015 Oil & Gas Overview report published by Peters & Co this week, miners believe there is “no oil price low enough” for them to significantly scale back on production. That is largely because of the significant costs involved in shutting down such massive industrial processes and then attempting to restart them when prices rebound. As a result, Peters expects oil sands production to continue rising steadily until 2020 regardless of what happens with the price of oil.
After 2020 is when oil sands production will stall without a significant price rebound. Peters estimates new oil sands projects will need at least US$70 per barrel WTI prices to be economic, with new mining projects requiring an even higher figure.
Canadian dividend-paying producers will require WTI at US$58 per barrel to avoid even deeper cuts, the Peters overview said. The Calgary-based investment bank believes only companies with strong financial positions (IE, low debt) and underlying assets that will remain valuable on the other side of the current downturn represent good buying opportunities in a US$45-$60 WTI price range. Among the large caps, Peters recommends Cenovus (CVE.TO), Crescent Point (CPG.TO) and Suncor (SU.TO), while in the intermediate space Parex (PXT.TO), Raging River (RRX.TO) and Whitecap (WCP.TO) have earned Peters’ favour. Spartan Energy (SPE.TO) was the sole junior producer to earn Peters recommendation, as the smallest players in the sector tend to have significantly more debt.
As profit approaches zero, Canaccord Genuity argued in a research note published Friday that “any debt is too much debt.” This is especially true for oilfield service providers since they rely on producers spending money to drill new wells for revenue -- and that business has all but dried up in western Canada. Case in point: Canadian Natural Resources (CNQ.TO) drilled a total of 346 new wells in the first half of 2014. For the same period in 2015, CNRL paid for just 40 new wells to be drilled, representing an 88 percent decline; that implies dozens of drilling rigs in heavy demand just one year ago are now sitting idle.
This downturn is also “far from uniform,” Canaccord argues, meaning some aspects of the sector are suffering more than others. The research note said “particular caution is warranted” for highly levered pressure pumping providers such as Trican Well Services (TCW.TO) and Calfrac Well Services (CFW.TO) while noting Secure Energy Services (SES.TO), Canadian Energy Services and Technology Corp. (CEU.TO) and Total Energy Services (TOT.TO) are actually poised to benefit from segments of their operations that mitigate the impact of the slowdown.
No shale production in the United States will be profitable with WTI at US$20 per barrel; and in fact, very little of it is economic even at US$45. The Peters & Co outlook zeros in on EOG Resources (EOG.N) as a case study, noting it is “widely regarded” as the best operator in some of the most prolific U.S. shale plays; but with WTI in the mid-$40s the company is “not generating sufficient cash flow to maintain production.” The IEA report released Friday said most of the non-OPEC supply drop in 2016 will come from U.S. shale, which would be in line with Goldman’s expectations as well.
WHAT IT MEANS FOR ALBERTA
More than 12,000 workers in Alberta have lost their jobs in 84 mass layoffs (defined as 50 or more at one time) so far this year, according to provincial government figures released Friday. Three were announced in the last week alone. While the provincial jobless rate remains below the national level, that could easily change if prices drop significantly from here. Even if prices remain relatively stable, ATB Financial chief economist Todd Hirsch said Friday “the slack in the energy sector is likely to continue throughout the second half of 2015 as oil prices have continued to slide.”
If early September oil prices are indeed still more than double where Goldman says they could bottom, significant levels of conventional oil production in Alberta and across the west will need to be curtailed. Oil and gas production represents more than 20 percent of Alberta’s gross domestic product and the province is already expecting real GDP to shrink 0.6 percent in 2015. Should oil prices continue to plummet from here, that contraction will only accelerate and the consequences – from higher unemployment to lower consumer spending and historic government spending shortfalls – will be all the more ferocious.
Jameson Berkow is BNN’s Western Bureau Chief. Follow him on Twitter: @crudereporter.