Canadian Oil, Gas Cos Cut Back 2009 Spending But Not Output

OTTAWA (Dow Jones Newswires), Dec. 12, 2008

Canada's oil and gas companies have made sharp cuts to their spending plans for the coming year, but their production hasn't suffered the same fate.

On Thursday, EnCana Corp. and Petro-Canada reduced their 2009 capital budgets by US $1.3 billion and C$2.2 billion respectively, adding to the billions already shed by other major companies in recent weeks. Canada's producers are pushing back future projects, largely in Alberta's massive oil sands, as sliding commodity prices and tight credit markets have constrained their funding ability.

But nearly all are aiming to maintain or even increase current production levels next year to maximize all sources of cash flow amid uncertain times.

"In general, the projects that are being cut are more of a longer-term nature," said Chris Feltin, vice-president and director of institutional research at Tristone Capital Corp. "The pace of spending on those (delayed projects) are really being cut back but that's not capital that would have been adding production in 2009."

The widely-anticipated budget cuts were flagged during the recent earnings season, when Canada's energy companies reported blockbuster profits but warned of tougher times ahead. Oil prices have crashed 70% off July's record highs to nearly $40 a barrel, sagging under the deepening global recession. Earlier Friday, Goldman Sachs (GS), the bank famed for predicting a "superspike" to $200 a barrel, slashed its 2009 price outlook to $45 a barrel and warned that crude could average $30 a barrel during the first quarter.

For most companies, however, the budget cuts are slowing production growth rates, not shrinking output, Feltin said, as they channel money into offsetting declining assets. Canadian Natural Resources Ltd., for example, has slashed spending in half but still expects to grow production 11% from this year, while Nexen Inc. hopes to generate 10% growth despite reducing its budget by 13%.

Canada's oil production next year will only be "a little less than we were anticipating," said Greg Stringham, vice president of markets and fiscal policy at the Canadian Association of Petroleum Producers, or CAPP. "But there's a significant drop in 2012 to 2015," when the bulk of the delayed projects were expected to start up.

CAPP has shaved 3% off its 2009 estimate for Western Canadian oil production from its annual forecast made in June, but the revision widens to 10% by 2015.

'Trimming Back'

Some companies will feel a more immediate impact from tighter purse strings. Petro-Canada expects major maintenance shutdowns to cut output between 360,000 and 395,000 barrels of oil equivalent next year versus 400,000 to 420,000 barrels of oil equivalent a day in 2008.

Talisman Energy Inc. recently indicated it could slice up to 9% off next year's budget, previously estimated at C$5.5 billion, as it focuses on high-returning assets.

"It would be nice if we had lots of cash and we could do it all, but we will be trimming back," Chief Executive John Manzoni said in early November. "That will have an impact on next year's production."

The company plans to release its budget in January.

Others are having to work much harder to stay level. Canadian Oil Sands Trust, majority shareholder in Canada's biggest oil sands producer Syncrude Canada Ltd., is boosting spending by more than half to C$440 million. Even so, Syncrude's production will remain unchanged - the extra cash is earmarked for maintenance and adding costly equipment to reduce emissions.

The trust has already lopped 40% off its monthly distributions in an effort to maintain balance-sheet strength.

Wiggle Room

Despite the caution, Canada's biggest producers are financially solid for the most part and can adjust their budgets should the economy take a turn for the better.

Canadian Natural and Nexen are keeping an eye out for an opportune acquisition, as is the virtually debt-free Husky Energy Inc.

The country's biggest oil and gas producer, EnCana, expects its production to remain flat next year but could boost its natural gas spending should the economy improve. The company has left enough wiggle room to raise or cut its budget by US $500 million, depending on whether the recession lifts or deteriorates further.

"At this point in time I think it's really too early to be making any bold capital moves," Chief Executive Randy Eresman said Thursday on a conference call. "In this downturn in the market we're just better off being a little bit conservative until we understand exactly how it's going to unfold."  

Copyright (c) 2008 Dow Jones & Company, Inc.

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