Top Operators Report: Liquidity the key to coming through the other side the COVID-19 crisis

Managing the balance sheet and maintaining liquidity through the COVID-19 crisis will decide who comes out the other side intact with the potential to attract new investment, says KPMG’s National Energy Leader Michael McKerracher.

While right now investors are looking at free cash flow and real returns, as the recovery takes hold he expects them to return to looking for growth.

“We’re going to see a different type of investor in energy going forward who is looking at the longer term. It’s not going to be like in the heyday with investors looking for quick wins,” he explains. “We’re not going to see dividends like in the past so it’s going to be a longer term play.”

But first companies must survive, and that means maintaining liquidity through the downturn, says McKerracher.

After five years of volatility, operators are familiar with the tools available to manage the cycle and debt to cash flow ratios. They are cutting capital expenditures, cutting operating costs, shutting in production, cutting or eliminating dividends, and laying off workers or cutting salaries to lower general and administrative costs (G&A). Operators are staying close to their banks and lenders to maintain their confidence. And hedging programs are in place to guarantee cash flows.

MEG Energy Corp. provides an example of how oil companies are pulling out all stops reacting to the downturn.

“The current business environment demands swift, decisive actions to enhance MEG’s already strong liquidity position,” says Derek Evans, president and chief executive officer. “To that end, we’re reducing production to minimal levels and advancing a planned turnaround, cutting capital by $100 million versus original guidance and reducing non-energy operating and G&A guidance by $20 million and $10 million, respectively.”

Targeted 2020 G&A expense is now approximately $15 million, or 20 per cent, lower than actual 2019 G&A expense, and approximately $30 million, or 35 per cent, lower than 2018 G&A expense.

Relative to the original budget, Evans said the turnaround that is set to begin in June is expected to be longer in duration, with completion expected in August, while being undertaken at a lower total cash cost by relying more heavily on internal resources.

“This allows the corporation to take advantage of the current low oil price environment by reducing turnaround requirements in 2021,” he says.

Junior oil companies are taking a similar approach. Gear Energy shut-in the majority of its production in April. All capital investments were previously halted in early March 2020. In addition, Gear implemented a 20 per cent reduction in the salaries of all permanent employees and in the directors' fees for its non- management directors, as well as an immediate and aggressive production storage and shut-in program.

Once certain price thresholds are met, production should be restarted with minimal cost. Gear has regulated production levels before in times of low commodity price environments with negligible impact to its oil reservoirs.

While oil producers try to survive, some gas producers less hard hit by the COVID-19 crisis are looking for opportunities to gain market share through mergers and acquisitions (M&A). Tourmaline Oil & Gas Limited is one such company.

“We see this as a generational opportunity in the M&A business, considering what assets and companies are trading at,” says Mike Rose, president and chief executive officer. “Our goal is to keep the overall basin gas supply in the same position. So we don't want to grow gas supply, and so we plan
to grow our gas business through selective and very accretive acquisitions.”

Rose says Tourmaline did two small transactions in the first quarter of 2020. Any future acquisitions will leverage existing infrastructure.

“We're not looking outside our three complexes, where our infrastructure is all in place,” he notes.


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.

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