That’s KPMG National Energy Leader Michael McKerracher’s one-word description of the current state of Canada’s oil and gas industry.
Over the last five years the industry has seen lower and more volatile prices as international oil and gas markets searched for a balance between supply and demand. A lack of market access resulted in even greater pricing discounts in Canada. Investment in the industry plummeted, resulting in a major contraction in the number of exploration and development companies in Canada.
But things were beginning to look up. Two major oil export projects are proceeding, creating egress for growing production. One major LNG export terminal is under construction, holding the promise of more future facilities.
And then, in March, came the COVID-19 pandemic. Global oil demand cratered, putting the industry in crisis mode.
“Any one with a poor balance sheet is at risk,” says McKerracher. “Unfortunately a lot of companies entered the pandemic with not great balance sheets. We’re going to see some companies struggle to survive.”
Banks and lenders are coming down hard, especially on reserve-based loans, he explains. “We’ll see some recapitalizations as well as companies going into CCAA protection. We may see more of that because banks need to get leverage down.”
Private equity has capital and could try merging smaller operators into larger, stronger companies. McKerracher also expects asset sales could pick up as larger companies target complementary reserves and production near their core operating areas. “Many companies are debt burdened so they won’t want the company, just the assets. As a result, this is stressful on the workforce.”
While times are tough, operators have been seen this before, he notes. “The industry is resilient and has been through several cycles and we’re survivors because of it.”
But with every cycle comes change. McKerracher says operators should undertake a strategic pivot to position them to survive the current downturn and future-proof their operations. “I like the idea of a strategic pivot or a new angle of attack. Move business in a new direction and make a mind-shift.”
This includes operators ensuring the proper business strategy and structure is in place. It means having financial controls in place to be agile in response to ongoing market volatility. It means a continued emphasis on operational excellence. It means considering vertical integration to limit risk and access value downstream in the supply chain. And it increasingly means a stronger focus on environmental, social and governance (ESG) issues important to investors and the public.
The oil and gas industry isn’t going away, says McKerracher. While there will be disruption like reduced prices of renewable energy sources and electric vehicles (EVs), the world is going to need oil and gas for a long time. “I don’t see any replacement for oil and gas for the production of energy and petrochemicals. There’s still a long tail on the industry.”
Despite the demand destruction wrought by the COVID-19 epidemic, most long-term energy outlooks forecast a rise in hydrocarbon use in developing economies, and increasing demand for non-combusted uses of oil and gas, he explains. “Companies need to look hard at ESG to ensure they have access to capital. Public opinion and investor opinion will not be swayed in this regard.”
Editor’s note:Canada’s oil and gas industry is at an inflection point. After five years of wild price volatility, market access issues, and other challenges, it now finds itself in the midst of a pandemic that has driven demand to lows not seen in decades.
This year’s Daily Oil Bulletin Top Operators report reflects the great uncertainty facing the oil and gas sector and tries to make sense of what the industry and successful operators in the post-pandemic future will look like.To do so, we made some changes to the Top Operators format.
Rather than comparing year-over-year data, in some instances our CanOils analysts compared first quarter 2019/2020 data to measure the impact of the early stages of the COVID-19 pandemic.
We also tapped into the experience of professional services firm KPMG to gain insight into what strategies operators and service companies could pursue to survive and thrive through the difficult days ahead.
Further, we leveraged the reporting power of the Daily Oil Bulletin staff and its ongoing coverage of the industry over the last four months to capture the industry’s response to the pandemic and its future outlook.
Download the report here.