Canada's Oil Firms Pull Back
NEW YORK (WALL STREET JOURNAL via Dow Jones Newswires), November 12, 2008
Canada's major energy companies are tightening their belts after a stellar earnings season, as the stresses in financial and commodity markets presage tougher times ahead.
Surging crude-oil prices buoyed profits for Canada's oil and gas producers during the third quarter, peaking near $150 a barrel in early July. Crude-oil prices started to slide soon afterward but still averaged more than 50% above year-ago levels, bumping up revenue even as output stalled or fell. Two of the country's biggest producers, Canadian Natural Resources Ltd. and Talisman Energy Inc., both saw their profits quadruple.
But companies are now looking to live within their means as executives predict a grimmer outlook for the current quarter and beyond. Oil prices crashed through the $100 level at the start of the quarter, quickly slumping below 2007 levels. Oil is now close to $60 a barrel, a level considered to be the break-even point for a wide spectrum of new oil projects.
Analysts reckon next year will be worse as recession fears crunch into already sluggish oil demand. UBS Securities expects crude-oil prices to average $60 a barrel in 2009, down from $100 a barrel this year.
"I think we've seen peak earnings, at least for a while," said Lanny Pendill, senior analyst at Edward Jones & Co. "Crude oil averaged $90 a barrel [in the fourth quarter of] last year and we're going to be below that -- it's just a question of how much."
Just as commodity prices boosted financial results on their way up, the current slump will likely be punishing for fourth-quarter earnings. And this will slice into the cash flow needed to fund existing operations and new projects, even as tightened credit markets make outside funding more difficult to come by and more expensive. For many companies, the obvious response is to cut spending to save cash.
Canadian Natural has nearly halved its 2009 expenditures to 4 billion Canadian dollars ($3.34 billion) while Suncor Energy Inc., Canada's second-biggest oil-sands producer, has slashed one-third off its budget, to C$6 billion. EnCana Corp., Talisman and Nexen Inc. have indicated they will also rein in spending next year.
Meanwhile, Canadian Oil Sands Trust, majority shareholder in the country's biggest oil-sands producer, has lopped 40% off its monthly distributions, to 75 Canadian cents, in an effort to maintain balance-sheet strength. An income trust, such as Canadian Oil Sands, is a Canadian investment vehicle that pays out most of its income to shareholders as monthly distributions in lieu of corporate taxes.
Others, however, sound more confident. Husky Energy Inc., which is controlled by Hong Kong billionaire Li Ka-shing, is under "no pressure due to liquidity or anything to map out our capital profile," Chief Executive John Lau said last month. ExxonMobil Corp. affiliate Imperial Oil Ltd. is also likely to push ahead with a major oil-sands development (last estimated at C$8 billion) early next year.
Both are virtually debt-free and so have a lot more freedom to funnel free cash to new projects or an opportune acquisition.
Mr. Lau said: "Husky's strong earnings and cash flow . . . [position] the company for further investment opportunities" while it sticks to its capital program and other financial commitments.
Even those with heavier debt burdens, such as Canadian Natural and Nexen, are keeping an eye out for a bargain.
The slide in oil prices could also spark some benefits for oil-sands developers in particular. Capital costs have rocketed in the past few years as companies rushed to build new projects, grappling with a limited and inexperienced labor force and soaring steel costs. Delays will eventually bring back some "normalcy" to Alberta's oil patch, Canadian Natural President Steve Laut said, but he warned: "If everybody then announces a project at the same time, costs will pick up again."
Integrated companies such as EnCana, Imperial and Petro-Canada may get a boost from their refining operations, which will benefit from lower crude-oil prices, Edward Jones's Mr. Pendill said, though refining margins still look weak going into the fourth quarter. Gasoline prices have plunged toward two-year lows on dismal demand forecasts.
EnCana could also be protected by the extensive hedges that hammered its profit earlier this year when oil prices soared.
Copyright (c) 2008 Dow Jones & Company, Inc.
- ExxonMobil Racks Up Discoveries in Guyana Block Eyed by Chevron
- Oil Market Sentiment Has Improved Significantly
- EU, US Eye Collaboration on Nuclear Materials
- USA Driving Activity to Increase to All-Time Highs
- TC Energy to Sell Prince Rupert Gas Pipeline Project to First Nation
- EU Electricity Export to Ukraine Up 94 Percent in Two Years
- China Coal Output Falls for First Time since Government Ordered More
- BP Pulse Buys One of Europe's Largest Truck Stops
- UK CCUS Plans Outdated: Think Tank
- North America Enters Rig Loss Streak
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- EIA Drops 2024 Henry Hub Gas Price Forecast
- EIA and Standard Chartered Offer Up Latest Oil Price Predictions
- Red Sea Region Sees Another Watershed Incident
- Chevron Oil Project in Kazakhstan to Cost $48.5B
- OPEC Voices Encouragement after IEA Affirms Support for Oil Security
- Biden Govt Bares Strategy for Freight Charging, Hydrogen Fueling Infra
- Rystad Looks at the Buzz Around White Hydrogen
- Ukraine Hits Third Russian Refinery In Escalating Drone Strikes
- VIDEO: Missile Attack Kills Crew Transiting Gulf of Aden
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- What Is the Biggest Risk to Offshore Oil and Gas Personnel in 2024?
- Is Peak Oil Demand Close?
- Vessel Sinks in Red Sea After Missile Strike
- JP Morgan, Standard Chartered Reveal Latest Oil Price Forecasts
- Exxon Rights in Stabroek Do Not Apply to Hess Merger with Chevron: Hess
- Rystad Forecasts Net Production of Top Permian Producers in 2024
- Analysts Reveal Latest Oil Price Outlook Following OPEC+ Cut Extension