The big thaw has been a long time coming. No, not the first hints of spring after five brutal months of winter. It's the warming up of Canadian oil and gas markets after more than two years of stone cold stagnation.
By mid-year, rising temperatures in the markets should radiate into oil and natural gas fields with greater capital spending. Collars will get hot in Calgary boardrooms; CEOs will feel more inclined to raise money, acquire companies and consolidate assets. Already the pace of financings and deals are tracking robust levels that could push the record books.
Equity markets are the most overt indicators of what's going on. Canadian oil and gas stocks have been rebounding with renewed vigour over the past few months. The S&P/TSX E&P index, the peer group of big independent producers, was up 11.2 per cent in the first quarter of this year. Entrepreneurial "juniors" – the small players that produce less than 5,000 barrels of oil equivalent a day (BOE/d) – were up an average of 20.4 per cent. Contrast both against the tepid U.S. oil and gas producers (S&P E&P: plus 3.2 per cent); the U.S. broad market (DJIA: minus 0.7 per cent); and other Canadian equities (S&P TSX composite: plus 5.2 per cent).
There are good reasons for the thaw. By the numbers, the Canadian dollar is down a dime, natural gas prices have doubled off their 2012 lows, and light oil price discounts have tightened up to within $5 (U.S.) of U.S. benchmarks. Technology is advancing productivity and scaled-up operations are reducing costs. And the eye-blink expansion of railway infrastructure to haul oil has been quick to make moot the market's angst about endless resistance to pipelines.
Then there is the blowtorch that can always be counted on to thaw out an icy energy market: geopolitics. The Ukrainian situation, amplified by Russia's natural gas hegemony over Europe, does not have a direct link to Canada's oil and gas industry. However, there are thick dashed lines between the two. When geopolitics flare up, international energy investors are reminded that the number of secure places to invest in oil and gas, free of corruption and state control, can be counted on one hand. As the fifth-largest exporter of oil and gas in the world, Canada is an index finger on that hand.
Quarterly financial reports from publicly-traded Canadian oil and gas companies will be released over the next several weeks. Results should be the most robust in several years and serve to further firm up the equity markets. Investment banks will be pitching more financing deals that will top up the estimated $75-billion (Canadian) of upstream cash flow this year (a near-record amount). Capital expenditures could push through $70-billion.
With vinegary memories of dismal natural gas prices and deep oil price discounts, few Canadian executives were in the right mood to invest with optimism this past winter – even if they had the money at the time to commit. As board meetings convene over the next few weeks, shareholder pressure will be on to play catch-up; to raise money; to invest capital to increase production; to take advantage of more robust pricing, netbacks and dynamics that look likely to persist for the balance of the year and into next.
Capital markets are not all that different from cold, snowy winters. When the thaw comes there is the potential for a flood.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.
Peter Tertzakian