The price of oil has slipped more than $12 (U.S) a barrel in a month, and is trading around $85.30 Thursday afternoon. Energy companies could face a slew of problems ranging from the possibility of dividend cuts (looking at you, Canadian Oil Sands Ltd.) to negative cash flow should oil’s tumble continue.
Should oil hit $70 a barrel, Suncor Energy Inc. and Husky Energy Inc. will show “modest” negative free cash flow, Andrew Potter, an analyst at CIBC World Markets, said in a note. Imperial Oil, controlled by Exxon Mobil Corp., would be “significantly outspending cash flow” at that price.
But don’t count Suncor and Imperial out. Imperial has a tidy balance sheet and a counter-cyclical mentality, making it unlikely the outfit would put the brakes on building its Kearl oil sands mine, the analyst said.
Suncor also gets the thumbs-up from Mr. Potter. It, along with Cenovus Energy Inc., are “best positioned in terms of liquidity and ability to finance growth through cash flow” when times get tough. Indeed, Cenovus will remain cash flow positive with oil at $70 per barrel, he said.
Cash flow is used as yardstick when considering how well energy companies can finance growth. When the sector was clobbered by the credit crunch and ugly oil prices a few years ago, chief executives across the board made financial vows to align spending with cash flow.
If current strip prices materialize, Mr. Potter thinks there is 15 per cent upside for the sector, and a 40 per cent gain should oil rally to $100 per barrel. If oil drops to $70 per barrel, the downside translates to 15 per cent.
At $70 per barrel and gas trading at $2.50 per thousand cubic feet, Canadian Natural Resources Ltd. will be pressured to cut between $1-billion and $2-billion from its 2013 capital expenditure projection, Mr. Potter calculates. This would trim between 3 and 6 per cent from Mr. Potter’s production growth forecast of nine per cent.
Under the same scenario, his spending forecast for Talisman Energy Inc. would drop between $400-million and $700-million, prompting Mr. Potter to cut his production growth forecast of 5 per cent by 2 to 4 per cent. Asset sales could ease this pain.
But it won’t take oil hitting $70 per barrel before problems appear. Anything below the mid-$80s could bring problems for some companies, Mr. Potter calculates. “Below this level [the mid-$80s] we would see progressive pressure for capex cuts especially from Canadian Natural Resources and Talisman in addition to massive pressure for dividend cuts from Canadian Oil Sands.”
Mr. Potter saves his most devastating words for Connacher Oil and Gas Ltd. “Only a deal can save [Connacher] from a death spiral in the low price environment,” he said.