Western Canadian oil prices hit a historic low on Wednesday as the worsening COVID-19 pandemic conspired with the fallout from the Russia-Saudi trade war to push Alberta’s resource sector into a new dire territory that has governments scrambling to provide aid.
The provincial and federal governments promised help for the industry in the coming days but have so far focused their efforts on direct financial support for people sickened or forced into self-isolation because of the pandemic. Both levels of government said announcements for the resource sector are imminent.
Western Canadian Select, the benchmark price for Alberta crude, briefly fell below US$8 a barrel before closing just above US$9, while West Texas Intermediate reached around US$20, the lowest in a little more than two decades. Oil producers announced another round of deep cuts to capital spending as stock prices continued to bleed value. Shares of some producers, such as Cenovus Inc., were down 80 per cent from a month ago.
The oil prices are far below what the province’s producers need to be profitable, and a prolonged rout would pose an existential threat across the industry. The collapse of prices has also rendered the recently tabled provincial budget essentially meaningless, with revenue projections that now appear disconnected from reality – a challenge that will only be exacerbated as costs mount to respond to the pandemic.
Alberta Premier Jason Kenney said his province is facing a level of adversity not seen since the Great Depression.
“We have never experienced anything like this in the history of our energy industry, layered on top of a massive global contraction of demand, and layered on top of five years of economic and social fragility," the Premier told the provincial legislature.
“We are facing a period of profound adversity.”
Mr. Kenney said the government would begin sending out financial aid by the end of next week for people who have been forced into self-isolation but are still waiting for federal income support. As well, the province will allow people to defer utility, mortgage and student loan payments. He said there will additional measures, including substantial economic stimulus aimed at industry, announced over the next few days.
Ottawa is planning an announcement soon on orphan wells remediation, which is seen as a way to put people in the oil industry back to work while addressing a serious environmental liability. The Alberta government has provided loans worth hundreds of millions of dollars to the province’s Orphan Well Association for the same reason.
The federal package unveiled Wednesday included $27-billion in direct support for people affected by the outbreak through programs such as employment insurance and the Canada Child Benefit. The government has also pledged $55-billion in tax deferrals for businesses and households.
Finance Minister Bill Morneau said his government would work with provinces as they come to Ottawa with their specific challenges, noting it’s “critical” his government also work with the energy sector itself to bridge the fiscal gap as the full impact of the virus that causes COVID-19 becomes clear.
“We’re not far enough along in those discussions to identify specific measures we will take, but we do recognize the urgency of those discussions and we are proceeding with that in mind,” he said Wednesday.
The package was announced as wide-spread spending cuts in the energy sector flew past $3-billion, following weeks of companies locking down their bottom lines through capital budget reductions, revised crude production forecasts and pruned dividends.
This week alone, Pembina Pipeline Corp. slashed its capital spending plan by about $1-billion, Enerflex Ltd. revised spending down by $120-million and Cardinal Energy Ltd. by $36-million.
Calgary-based Enerplus Corp. reduced its 2020 capital spending plans by 40 per cent to $325-million, while Vermilion Energy Inc. trimmed its capex budget by up to $100-million and cut dividends by 91 per cent. Crescent Point Energy Corp. president and chief executive officer Craig Bryksa also announced his company had revised its capital spending plans down by 35 per cent, citing “severe volatility” in commodity prices.
They followed in the footsteps of oil sands producer Cenovus Energy, which last week slashed its capital expenditure program for the year by about $450-million, and Husky Energy Inc., which announced spending cuts of $1-billion and plans to shut down unprofitable production.
As oil fell, share prices followed.
By the end of trading Wednesday, energy markets were awash with red. Husky shares shed 8 per cent, bringing it to a 70-per-cent cut over the past month. Suncor Energy Inc. shares suffered a 16-per-cent loss, while Cenovus fell by nearly 18 per cent – an 80-per-cent hit since Feb. 18. Vermilion finished 86 per cent down month-over-month, shedding close to 25 per cent Wednesday.
The cuts have crumbled hopes of a $2-billion increase in capital spending projected two months ago by the Canadian Association of Petroleum Producers. The association’s prediction came with anticipation of creating or sustaining about 11,800 direct and indirect jobs across Canada, and the first uptick in oil sands investment in five years.
CAPP president and CEO Tim McMillan told The Globe and Mail this week the pullback on spending means more sector job losses, though the exact number will depend on whether companies cancel expansions and new builds, or tighten their belts to weather the current economic storm.
“With the changes in the market in the last two weeks, every single company I’ve spoken with is taking direct and substantive action to make sure their balance sheets are as strong as possible,” he said.
Last week, Mr. Morneau announced that the two Crown corporations that lend to Canadian businesses – Export Development Canada and Business Development Bank of Canada – would boost loans by $10-billion, as part of a strategy to inject additional liquidity into the economy.
But Martin Pelletier, portfolio manager at Trivest Wealth Counsel in Calgary, said some energy companies simply aren’t going to survive.
The heart of the problem is the “double-threat” of COVID-19, which will directly hit economies hard and then compound the damage with cripplingly low oil prices.
“Mid- and small-cap companies, they don’t have access to capital and their cash flow has dried up because of the oil and gas price. It’s a multiplier effect. So if this goes on, they are going to go out of business. They won’t make it out,” he said.
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