Canada’s energy industry is buckling under the weight of twin crises: a global pandemic and an oil price war. Now, governments are poised to act.
With survival at stake for many companies, a massive aid package, expected in the coming week, has to address the two biggest problems threatening them now. The first is access to credit, and the second is cutting costs as cash flows dry up.
The credit and liquidity issue will require co-ordination with the banks, which have shown in recent days they are worried about their exposure. Federal and provincial governments have taxation, fiscal and regulatory levers they can use to take off cost pressure. Alberta announced some of those on Friday.
For the oil patch, there are eerie similarities to the financial crisis of 2008-09, when governments around the world were forced to bail out banks or face dire consequences.
Now, lingo born at that time – such as the troubled asset relief program or TARP – is being dusted off and repurposed for this big and important part of the economy. The Globe and Mail has reported that a $15-billion aid package is now being hammered out is the first instalment of Too Big To Fail, Canadian-style.
To recap, the country’s energy companies had yet to fully recover from the oil price downturn of 2014-15, when the COVID-19 contagion emerged in Asia and began to eat away at global crude demand as cities shut down and prices weakened.
Then, with the novel coronavirus that causes COVID-19 spreading around the world, members of the Organization of Petroleum Exporting Countries, led by Saudi Arabia, failed to agree with Russia on limiting output. The two major producers responded by launching a price war to wrest market share from each other. It sent crude prices tumbling to multi-decade lows.
Canada is caught in the crossfire, and its oil companies are faced with prices that are far below break-even. Every barrel they produce is tainted with red ink, which is reflected in their share prices, which in some cases have been reduced to pennies.
Almost everyone has slammed the brakes on spending and cut payouts to shareholders to preserve capital, but with cash dwindling, such measures, as drastic as they are, won’t save companies without deep pockets.
That puts the focus on credit, and whether oil and gas producers have the access to it that they assumed they did as the crisis began. One company, Bonavista Energy Corp., said this week it tried to make a withdrawal from its line of credit, which was not near fully drawn, and was denied.
As part of any aid package, the industry, government and banks must find a way to deal with the implications of sector-wide failures to meet debt conditions related to staying above cash-flow and stock-price thresholds.
So far, it has been on an ad hoc basis, between the companies and their banking syndicates, said Tristan Goodman, president of the Explorers and Producers Association of Canada, which represents the small and mid-sized companies that are among the most vulnerable. This is why Bay Street needs to be involved.
“Banks are going to have to be patient. Some may be and some may not. But let’s be practical here, this is unprecedented,” Mr. Goodman said. Canada and the world are racked by fear, but at some point Saudi Arabia and Russia will have to call a truce, because their own economies cannot hold out forever, he said.
“If banks can be patient, that will be valuable for them as well as for the overall Canadian economy and the people who rely on the energy patch.”
Finance Minister Bill Morneau has talked about a government cash injection through funding cleanup of the growing number of orphan wells – those whose owners have already gone bankrupt. Alberta Premier Jason Kenney recently announced provincial funding for that. For struggling oil companies, Mr. Morneau also talked this week about “approaches that enable them to bridge through the challenging time.”
Senior oil patch executives have floated the idea of a TARP-like program, which the U.S. Treasury established in late 2008 to buy stock and assets from banks, insurance companies and automakers. Presumably, this could be done by direct provincial and federal investment, or through Crown corporations.
This would cause no end of consternation among taxpayers who have questioned public money going to the fossil fuel industry. With thousands of jobs at stake, file this under searching for the best options among a range of distasteful ones.