In Conversation with KPMG in Canada’s Narmin Vasanji and Nilesh Kujur

The Daily Oil Bulletin/JWN Energy engaged Narmin Vasanji and Nilesh Kujur for insights into cash flow management as the sector emerges from the bottom of the commodity cycle.

Narmin Vasanji is a partner and regional leader for KPMG’s Management Consulting practice in the Prairies, who helps clients transform their business with a focus on back office transformation enabled by technology in various industries including oil & gas, and power & utilities.

Nilesh Kujur is a Director at KPMG in Canada focusing on Energy & Resources clients. Prior to becoming a management consultant, Nilesh worked as an engineer in an oil and gas company.

In past commodity price cycles as prices rise we have seen companies invest increased cash flows or access debt or equity markets to grow production or finance new projects. So far, this hasn’t happened this cycle despite the price signals. Is it just early in the cycle and once balance sheets are repaired we will see a return to organic growth or is it “really different this time?”

We are not seeing a lot of net new investments in particular by the large energy players. We are seeing cash flow going back to investors via dividends vs. new projects. The medium-to-small companies have been more focused on increasing production and reducing debt to improve the balance sheet.

This is to be expected coming out of a period of constant change and disruption. We are finally in a period of better stability from the pandemic but there are still significant regulatory pressures, cost pressure and expectations from various stakeholders around climate change. We believe that it could be some time before we see this shift to grow production (net new), particularly given the focus of investment on climate change and energy transition as well as uncertainty around geo-political events. 

Right now we are seeing an emphasis on paying down debt and returning capital to shareholders through buybacks and dividends. We have seen some special dividends paid out as well. Once debt reaches sustainable levels operators will have more free cash flow and more options. Where do you see this cash going?

We expect the larger players to increase the level of M&A activity whereas the medium and smaller companies will focus on consolidation after commodity prices start to stabilize in the next few quarters. In our view we don’t see a significant amount of capital being returned to shareholders through dividends or as much of a focus on measured organic growth. We really expect to see a shift in the types of investments made to focus more on energy transition projects and in particular those companies that have publicly made commitments to net zero.

Market access has been an ongoing concern for oil producers for much of the last decade. Given recent expansions, is this behind us? Will Canada finally become a player in global oil markets and what does that mean for producers?

Certainly there are some improvements to come with market access for oil producers but there is still more work to be done here. TMX is expected to be 50 per cent completed in the summer. Given that we have approximately 88 per cent production (say 3.5M+ boe) via pipeline and the remainder on rail and marine, TMX will have some positive impacts for oil production but no other major changes are anticipated in the short term.

Canadian gas producers have been diversifying the markets they sell into as well. We’ve seen large producers enter long term contracts to export gas through U.S. LNG markets. It also appears that LNG Canada will have to contract some gas supply. Is Canadian gas going global?

We are seeing a shift from continental to a global gas market and LNG Canada is going to be instrumental to increase Canada’s further presence into global markets. This is an exciting opportunity for us in Canada. It does mean we might expect some increases locally in the market price for natural gas.

We expect that further growth will be generated as natural gas producers become a player in the blue hydrogen value chain.  As technology develops and there is more large-scale investment, we expect that the price of hydrogen will decrease to more competitive levels, increasing adoption.

The importance of addressing ESG risks has become a priority within the industry. What impact is ESG having on current investment of cash flow and will it increase in the future?

Environmental, social and governance (ESG) topics are reshaping our landscape, impacting how we view performance, how we make decisions on where to invest and is key to long-term success. The heightened pressure from stakeholders and regulators to drive long-term value through sustainability means that companies need to integrate this into all levels of their organization.

We are seeing the large players commit to Net Zero and this will clearly impact their capital investment. Examples of this that we are seeing include the shift to renewable diesel and we see a number of refineries moving in this direction. There have been two renewable diesel projects announced in Western Canada. This is all to help customers decarbonize and meet these goals and shows a recognition and commitment to energy transition.

Similarly, when we look to the mining industry as another example as they are focused on electrification, improving data management and integrity of ESG reporting, and increasing energy independence by looking to renewable energy solutions to help decarbonize their energy requirements. Leading companies are going to be taking a close look at how to decarbonize across their organizations, continuously improving their ESG performance so that they can continue to have the confidence of investors, governments and customers. 

Editor’s note

The last five years have been a hard ride for Canadian oil and gas producers.

Wild price volatility, a pandemic-induced price crash, ongoing market access issues, oil production curtailment, the rise of the ESG movement, and finally a geopolitical crisis are just some of the challenges industry faced.

The end result of this period of instability is a reinvigorated industry – forged in fire so to speak – and ready to take on the world as the commodity cycle turns once again.

The 2022 Top Operators Report examines the 2017-2021 timeframe, identifying key trends that shaped the present energy landscape and what lies ahead for the 62 Canadian headquartered public operators tracked this year. 

To sort through these challenges we are once again leveraging the experience of professional services firm KPMG in Canada to provide insight into the last five years of change and what strategies operators could pursue to thrive in the inevitable turbulence ahead.

Data analysts from Evaluate Energy are providing context to the stream of information coming from corporate financial reporting and other relevant documents. Analysts from geoLOGIC systems ltd. offer context into trends in activity and technology to manage costs. 

We’re also tapping into a broad swath of the insights and opinions from industry leaders gleaned from Daily Oil Bulletin coverage.

To download the 2022 Top Operators Report, click here.

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