Canadian Natural Resources Ltd., the country’s largest oil and natural gas producer, is slashing capital spending next year by 20 per cent amid low commodity prices and pipeline problems, but said it is ready to reverse the bulk of the cuts if conditions improve.
The company’s strategy reflects the uncertainty in the oil business. The price of Alberta heavy oil crashed earlier this fall, but has rallied. The Alberta government this week said it would order all major oil producers to cut output at the start of January to deal with an oversupply. Capacity to move oil by rail is set to rise, but pipelines are still full.
Canadian Natural said on Wednesday it will spend $3.7-billion in 2019, down some $900-million from $4.6-billion in 2018. Most of the cuts are in its heavy-oil operations. Canadian Natural also said it could turn up spending by about $700-million if market dynamics shift. In such a case, the budget for 2019 could reach about $4.4-billion, down only $200-million, or 4 per cent, from this year.
“Canadian Natural is built to be able to manage through low prices,” president Tim McKay told investors on Wednesday as the company detailed its plans.
In a news release, Canadian Natural expressed concern about a lack of new pipeline capacity and questioned how the industry itself works. In a statement, Steve Laut, executive vice-chairman, called the process by which oil producers work with pipeline companies to get barrels on the move “dysfunctional.”
For the longer-term, Canadian Natural’s 2019 budget includes investments in the production of more heavy oil. Two new projects in northeastern Alberta will start operating late next year. One will produce 40,000 barrels a day by 2021, the other about 26,000 barrels a day through 2020. Canadian Natural said in its news release that the timing of both projects fits with expected “improved market access.” Pipeline company Enbridge Inc. has said the expansion of its Line 3, which goes to the United States, should be open by this time next year.
In a normal market, Canadian Natural said it would spend upward of $5-billion in a year to generate production growth. That amount would be close to a 10-per-cent increase over its 2018 budget.
With its current plans to cut expenditures by 20 per cent, Canadian Natural said its production in 2019 will likely hold steady at about 1.075 million barrels a day.
The one area in 2019 where Canadian Natural plans to notably increase spending is at its oil sands mining and upgrading operations, where it produces a valuable synthetic oil. Expenditures there will be $1.53-billion, up almost 20 per cent from this year. Production in 2019 could increase by about 6 per cent to 450,000 barrels a day.
Analyst Jon Morrison of CIBC World Markets said Canadian Natural showed “strong fiscal restraint” with its conservative budget, but also highlighted its ability to “dial spending” higher. TD Securities analyst Menno Hulshof noted that Canadian Natural’s 2019 spending plan is lower, on a relative basis, than what it spent in 2016, at the depths of the oil bust.
Stock of Canadian Natural rose about 4 per cent on Wednesday to $37.33, up $1.52 in Toronto.
West Texas Intermediate oil, the North American benchmark, traded at about US$53 a barrel. Western Canadian Select (WCS), the Alberta heavy-oil benchmark, was going for about US$31 a barrel on Wednesday, according to Net Energy Exchange. The price for WCS dropped as low as about US$10 a barrel this fall.
Canadian Natural is the first major oil company to announce its 2019 plans, an indication of how the oil patch’s strategy could unfold in the next year. Cenovus Energy Inc., another major producer of heavy oil from the oil sands, will announce its spending plans on Dec. 11, around the same time it does each year. Suncor Energy Inc. typically unveils its budget in mid-November, but has not as yet, and now says its decision making has been delayed because of the Alberta government order to cut production. Suncor had opposed those plans, while Cenovus and Canadian Natural were in favour.
David Ebner