2016 Oilweek Top 100: Canadian producers are collateral damage in the new oil era

Canadian operators, complacent after five years of uninterrupted growth due to artificially high prices, are collateral damage in the global realignment of the oil market.

For evidence, look to the red ink spilled all over this year’s Oilweek/CanOil’s Top 100 financial tables. Seventy-three of the Top 100 reported negative net income in 2015, tallying a combined loss of $30 billion in the year. This compares with a positive net income of $14.6 billion the previous year. Revenues declined from $96.3 billion to $68.8 billion as a result of the price rout.

Cash flows retreated from $54 billion in 2014 to $34 billion in 2015, no longer covering capital expenditures.

Despite the huge financial contraction, production continued increasing unabated, rising from 5.36 million boe/d in 2014 to 5.65 million boe/d in 2014, driven mostly by oilsands projects coming on stream.

Is there any good news going forward?

Maybe.

“We’re starting to see some daylight,” said Martin King, vice-president of institutional research at FirstEnergy Capital. “Things are starting to look better.”

Fundamentals have shifted enough that there will be a true rebalancing of the market, possibly as soon as the third quarter of this year, King told the latest International Energy Market Update Breakfast at the Calgary Petroleum Club.

“Things are changing enough, prices have been low enough for long enough to get enough things moving in this market in terms of demand, in terms of supply, even inventories to some degree,” he said. “You’re seeing a rebalancing happening in these markets. We think it could be as soon as the next quarter, maybe by the middle of the year.”

Non-OPEC supply is turning “seriously negative” in 2016, with additional losses looking more likely for 2017, he added.

In the U.S., cuts to capital spending, less drilling, production declines and the shutting-in of wells have all taken a toll on supply, and supply-loss momentum is accelerating, not slowing.

While there are concerns that the latest price rally may trigger resurgence in U.S. supply growth, FirstEnergy believes this is unlikely, at least at this stage.

That’s because capital spending programs have largely been finalized for the first half of the year and for some companies, all of 2016.

Oil market balancing

As for other non-OPEC suppliers, the early-2016 price collapse has forced many national and international oil companies to reduce spending; their impacts has started to emerge and could become larger next year.

No active supply management is forthcoming from OPEC, King added, noting they are still battling for market share.

In terms of demand, China is doing far better than anyone expected despite concerns over an economic shift. India and other Asian countries are doing well, Russia is recovering nicely, U.S, demand is looking strong again, and Europe is recovering mildly; however, Brazil and other Latin American countries are trouble spots, he said.

Oversupply is actually smaller than most people think, and revisions are trending in the direction of a tighter market, said King.

“The general view is that this market is getting more balanced, that the oversupply as is often reported is grossly overstated, and we’re much closer to a balanced position on a global basis than I think is widely realized, and that’s why this price rally that we’re seeing right now is for real,” said King. “It has good legs under it.”

Canada is one of the few regions still able to grow supply and capture market share in the U.S., said King. More optionality in terms of Canadian supply outlets will still be needed post-2020. Supply growth will not come to a halt, he said.

Natural gas

Even the future of natural gas appears to be improving, said King, who believes the worst time for natural gas markets is right now.

For natural gas producers, the law of supply and demand has been strictly enforced since the shale gas boom that began in the U.S. almost a decade ago. Production continued to rise throughout 2015, and with the El Niño as an accomplice, a supply build-up stripped most Canadian gas developers of nickels and dimes of profit per mcf of sales by year-end.

Thanks to the El Niño, North America experienced one of the warmest winters on record, leaving record-high storage and the lowest prices in nearly two decades. Solid U.S. supply growth in 2015 only made matters worse, he said.

Current low prices are starting to have more of a pronounced negative impact on supplies. Demand is getting a boost from low prices and structural change in power generation.

Despite the apparent immensely negative prices from record-high storage, there are numerous reasons to believe that prices cannot just stabilize, but rally into the second half of 2016, perhaps strongly in the event of a hot summer.

Among those reasons are that U.S. supply is showing signs of a significant rollover because there are delays in getting pipeline infrastructure added in sufficient quantities in the U.S. Northeast and structural demand growth is improving, especially in power generation.

The U.S. natural gas supply is reversing course, said King, adding that the slowdown among exploration and production companies is starting to take a toll, along with low prices.

Among the negatives for supply are that capital expenditure reductions have been substantial, and the U.S. is incapable of supporting natural gas supply growth with its current rig count. The Marcellus and Utica are the only growth zones, but they need pipelines.

According to King, after posting a very solid gain in 2015, Canadian additions of natural gas are starting to slow down as declines and very slow drilling are starting to bite. The gas rig count is at its lowest level since 1992, and very low prices are prompting some shut-ins.

FirstEnergy foresees year-over-year supply losses starting to mount in the second half of this year, with the possibility of more in 2017.

Supply costs dropping

Adding to the stilted optimism is news that western Canadian supply costs are dropping, making production more competitive on a global basis, according to the just-released Canadian Energy Producers Benchmarking Study by CanOils.

The study, which calculates supply costs for junior, intermediate and international companies headquartered in Canada, found across-the-board declines in supply costs in 2015 when compared with 2014.

Intermediate producers saw their mean supply costs decline by 14 per cent from $41.29/boe to $35.40/boe.

Intermediate producers saw minimal declines in finding and development costs in 2015, with the mean declining only two per cent. This is partially due to gas-weighted companies focused on development drilling in the Montney and Deep Basin, says the report. Day rates for rigs capable of pad drilling remained strong throughout the year. It is also partially due to more intensive fracture stimulation programs pulling forward production without necessarily adding comparable increases in reserves.

The biggest savings in 2015 came from lower royalty payments, which declined 60 per cent compared with 2014.

Junior producers saw their full supply costs decline 20 per cent to a mean of $32.76/boe. Finding and development cost declined by 13 per cent, and operation costs declined by nine per cent.

“On average, junior companies made great strides in cutting supply costs in 2015, cutting costs, excluding royalties, by $3.35/boe,” the report says.

General and administrative costs also declined significantly in the junior category, with a mean decline of 19 per cent.

The CanOils study looked at six metrics to determine full supply costs. They include finding and development costs, operating and transportation expenses, general and administration expenses, interest payments and royalty expenses.

Click here to download Oilweek/CanOil’s 2016 Top 100 financial tables.

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